Last Friday money-transfer company Xoom Corp (NASDAQ:XOOM) had its IPO, with shares rising from the initial price of $16 to around $25 by the end of the day. This puts Xoom’s market capitalization at just about $800 million.
The first question you should ask about any IPO is whether or not the expectations are too high. Xoom has yet to turn a profit and recorded just $80 million in revenue in 2012. Investors are clearly expecting fantastic growth, but how realistic is this?
I recently wrote an article about fellow money-transfer company The Western Union Company (NYSE:WU), a company which dominates the business with about $5.6 billion in revenue in 2012. Smaller competitor Moneygram International Inc (NYSE:MGI) recorded $1.3 billion in revenue, but the real difference is in the profits. Western Union has a free cash flow yield of over 16%, while the smaller MoneyGram only achieved a FCF yield of 11.6% in 2012. This isn’t a bad result, of course, but clearly this is an industry where scale allows for significant advantages.
Xoom’s IPO values the company at about 85% of the value of MoneyGram, a company which has 16 times the revenue and more profit than Xoom has sales. Let’s do a simple calculation to find out exactly what the market expects from Xoom given its valuation.
A growing concern
Xoom was founded in 2001 and has grown its annual revenue to $80 million since then. The company saw 60% revenue growth between 2011 and 2012, which an impressive number even considering the small size of the company. Net income and cash flows have yet to turn positive, which makes any kind of future estimates extremely fuzzy. I’ll make a few simplifying assumptions to estimate values for the next few years.
- Revenue grows by 45% annually, the 3-year growth rate
- COGS grows by 27% annually, the 3-year growth rate
- OPEX grows by 45%, the 3-year growth rate
All values in million USD
At this point Xoom would have reached the size of MoneyGram in 2004 in terms of revenue. From that point until now MoneyGram has grown revenue at an annualized rate of 6.2%. In the same period Western Union has grown revenue at an annualized rate of just over 6%. But look at the net income:
All values in million USD. Data from Morningstar