Remitly Global: Tipping Point?
Scale, increasing competitive advantages, and reinvestment runway
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Remitly Global — one of the few stocks I bought in 2024 — reported Q4 earnings last week.
The stock dropped 10% after the report. It is still up around 75% in the last six months. I thought the report was impressive, adding more to my conviction in the company’s growth prospects. I plan on adding to my position soon.
Here’s why.
Decreasing costs at scale
Here are the headline numbers from Remitly’s Q4:
33% YoY revenue growth
7.8 million active customers, up 32% YoY
39% growth in send volume
Record gross margin of 60%
Slight net loss
As Remitly enters more corridors around the world, obtains better deals from payment/banking partners, and achieves more scale, its gross margins improve:
What makes this gross margin expansion impressive is that simultaneously Remitly is lowering its costs for customers. Send volume grew 39% year-over-year last quarter, while net revenue (what Remitly keeps as a take rate) grew 33% year-over-year.
Costs for customers went down. Gross margin went up. While not apples to apples, Remitly is in a position where it can consistently reduce the cost of remittances, keep some of these savings for itself AND simultaneously pass on these savings to customers. That sounds like economies of scale to me.
Don’t forget that unlike Wise (which isn’t a true competitor), Remitly serves over 500k cash pick-up locations around the world. This is not an insignificant cost, but improves the value proposition of the Remitly service.
Of course, we can’t forget the economies of scale coming from scaled global marketing spend. Outlined by fellow long Mario Cibelli, Remitly’s digital-first systems and scale give it a competitive edge vs. legacy peers (i.e. Western Union) and any start-up.
Its product is simply better and difficult to replicate, no matter how much money is thrown at the problem. Management is not resting, either. There is plenty of runway left to reduce costs, expand to more corridors, and add on adjacent personal finance tools (like Remitly Circle).
With this advantage, Remitly has the ability to deploy billions of marketing dollars over the next 10 years with fantastic return on ad spend (ROAS).
To illustrate, in 2024 Remitly spent $304 million on marketing. In 2019 it spent $43.5 million.
In 2019, marketing dollars were 34% of revenue. In 2024, it was 24% of revenue. Five years from now, I expect Remitly’s nominal marketing spend will grow to $1 billion while marketing spend as a % of revenue will decrease to 20%.
Have we hit a tipping point?
As of Q3 2024, Remitly was just 3% of the global remittances market. It is still a minnow compared to Western Union.
Given the competitive edge outlined above and management’s sharp focus on scaled marketing with good ROAS and decreasing remittance costs, I think Remitly is hitting a tipping point in global adoption.
Remitly has a chance to deploy a lot of marketing dollars in the next few years. Its target customers will switch to and stay with Remitly because it is the best product on the market. This will lead to consistent revenue growth, gross margin expansion, and eventually leverage on the operating income line.
Ask yourself: what is stopping Remitly from hitting 10% market share in remittances? 25%?
Undemanding valuation
According to our friends at Finchat, Remitly currently has a market cap of $4.8 billion. It is a serial diluter with stock, so let’s say dilution would bring us to a market cap of $6 billion in five years (also assuming any excess cash flow is spent on buybacks, just to simplify the model).
So you have a $6 billion market value today. Okay, well what could Remitly earn five years from now?
I think they can easily surpass 10% market share in global remittances. With the remittance market growing, protection from inflation, and the add-on products such as Remitly Circle, I think revenue can 4x to over $5 billion.
If you chop off $2 billion for fees, $1 billion for marketing, and $1 billion for product development and G&A, that leaves you with $1 billion in operating income.
I think this $1 billion in operating income would be valued at $20 billion, if not much more given that Remitly will have greatly increased its moat and will still have a long runway to grow in 2030. I wouldn’t be shocked if it was valued at $40 billion (depending on broad market sentiment, of course).
Even if the company falls short of these estimates and we hit a bear market, the stock is still wildly attractive here. This is why I plan on adding up when I deposit new cash into my brokerage account.
-Brett
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