On Friday, the IPO for the cash-transfer service provider Xoom, Inc. (XOOM) soared 59% after being priced above the initial range. After reading the final prospectus, the company harkens back to the technology IPOs of the late 1990s when a stock had as much hope as hype.
The company is a global online money transfer provider, focused on helping consumers send money in a secure, fast, and cost-effective way using their mobile phone, tablet or computer. Xoom has 750,00 active customers that sent more than $3.2B to family and friends in 30 countries worldwide during 2012.
With a revenue base of $80M, Xoom follows in the footsteps of the recent ExOne (XONE) IPO (see Does The ExOne IPO Offer Any Value?) where the company was substantially smaller than companies going public over the last few years.
The initial offering raised $101M with the company receiving $77M of the proceeds. The offering included 5.22M shares offered by the company, 1.1M offered by selling shareholders, and 949K shares exercisable for over-allotment to the underwriters. The company expects net proceeds of $88.8M assuming the underwriters exercise their option to purchase the additional shares.
The offering priced at $16, above the range of $13 to $15. At the offering price, the stock had a valuation of over $520M. After the first days trading, the stock now trades with a market cap of over $830M.
The company will only have 32.7M shares outstanding even after offering around 20% of the outstanding shares. A very refreshing percentage of shares offered along with the ExOne IPO after several of the social IPOs offered less than 10% of the outstanding shares. A limited percentage of shares offered to the public can lead to a artificial lift in the stock and consequently a large selloff as existing shareholders unload the stock.
The proceeds will be used for working capital and general corporate purposes with the possibility of buying complementary businesses, products or technologies.
The company reported revenue of $80M for 2012 and an adjusted EBITDA loss of $500K. The loss from operations was $4.3M prior to a $2.4M stock based compensation charge.
The customer base continues to surge as active customers and new customers grew substantially over 2011. Xoom also saw a roughly 90% growth in gross sending volumes to $3.2B. The company has a small fraction of the money transfer business that is estimated to reach over $685B by 2015. A market that is only growing at a 7% GAGR requiring the company to take market share in order to grow fast.
With the current market cap reaching 10x revenue, the stock trades roughly inline with recent IPOs. The key will be whether the company can turn that growth into profits. The 2012 operating loss actually exceeded the 2011 loss by just over $200K. The adjusted EBITDA did improve by $2M so that trend should encourage investors.
The Western Union Company (WU) is the clearest and biggest direct competitor. The company has an $8.2B market cap with a revenue base of over $5.5B. Analysts expect a decline in earnings for the company in 2013 suggesting competition from the likes of Xoom has started eating into profit margins.
In the fourth quarter, the company reported electronic channels, which include westernunion.com, account based money transfer, and mobile money transfer, represent only 4% of total revenue compared to 3% in the prior year.
The channel saw 22% growth with online money transfer transactions increasing 40%. The revenue total reached over $50M for Q4 and a run rate of around $200M. Based on these numbers, Western Union is already a sizeable competitor in the electronic and online area even if the total isn't impacting to the company itself.
MoneyGram International (MGI) is another sizeable competitor though with a market cap of only $930M the market doesn't see it as that formidable based on the valuations.
Pre-IPO Investors To Benefit
A recent GSV Capital (GSVC) presentation highlighted the push towards historically large IPOs. In fact, the company raised capital as a way to provide investors in the stock market with an opportunity to invest in small cap companies no longer going public. As an example, GSV owns stock in Twitter that was recently valued with a market value of around $9B.
The move towards smaller technology related IPOs could either help or hurt a firm such as GSV. Being able to purchase ExOne or Xoom prior to going public would provide a huge boom to the company and the stock after huge gains. Not to mention the reduced time to market could really speed up profits. Presently, with GSV trading considerably below NAV, a few well-timed IPOs such as these could send the stock soaring.
On the flip side, GSV was created in order to take advantage of the delayed IPO process. If small tech companies' start hitting the public markets sooner, the shares may not exist for GSV to purchase. After all, insiders and private equity firms would be more willing to wait if an IPO was around the corner versus the current environment where a stock such as Xoom normally would've waited another year or more.
As with ExOne, the IPO is a refreshing change where a company is going public before the large growth period has already occurred. Lately, similar growth stocks have obtained capital in the private markets via private equity firms or a company like GSV.
Unfortunately, these stocks come screaming out of the opening at prices where only investors in a firm such as GSV or large institutions benefit from the surging prices. It still isn't apparent that the eventual IPO pricing will be more attractive to investors over buying a GSV Capital trading substantially below NAV, but it is very refreshing to see a company going public at a size prior to the major growth phase.
As far as Xoom, the stock now has a questionable market valuation. Western Union could be a formidable force and any number of other companies are likely to join the online money transfer business. The business could be good for Xoom, but investors shouldn't expect Xoom to continue zooming higher.
Disclosure: I am long GSVC.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.