As an investment, Remitly ($RELY ) is small-cap ($1.8B) tech stock that I believe currently trades at or near fair value but has the potential to 10x in the next 5 years. You’re buying a disruptive high-growth (68% YoY while brick-and-mortar incumbents lost market share in the same period ) tech company with strong business fundamentals, an easy path to profitability, yet trades at near fair-value to that of legacy soon-to-be-extinct brick-and-mortar incumbents. As a free gift, you’re getting a multi-national neobank for immigrants which isn’t even priced in while Nubank, the Brazilian neobank startup, IPO’d at $40 billion.

As a trade, I think there is a 50/50 chance that Remitly has a blowout Q42021 earnings with the short term downside being bounded by a 20% loss while the short term upside can be 35%. This is not to suggest OTM straddles are prudent, as the business is likely to grow super-linearly but not exponentially.

Remitly grew 69% YoY last quarter while WesternUnion lost 5% of its North American battleground market. WesternUnion charges twice as much as its competitors and frankly ripping off customers. People aren’t dumb, they just haven’t embraced digital platforms yet. Once people experience a more convenient app product, speedy transfer, helpful customer support, and saving significants amount of money, no one will come back. During a time of economic hardship on immigrants during the pandemic, WesternUnion has squeezed profits out of customers. This indicates they know they are doomed and trying to make as much money while they still can. $1 is nothing to a corporation, but $1 buys immigrants’ family an entire meal. WesternUnion is a dinosaur that has been stubborn to adapt and it’s digital-platform will have disadvantages to an actual tech company like Remitly.

Disclaimer: I own shares ( average price $11.99) and ITM LEAP call options ($ 10 ) which I bought post-IPO. THIS IS FOR ENTERTAINMENT AND/OR EDUCATIONAL PURPOSES AND NOT INVESTMENT ADVISE.

Core Business / the pie

Remitly’s core business is remittances — the business of immigrants sending money across borders. It is currently the largest digital-first remittance player listed on American stock exchanges. WesternUnion, the brick-and-mortar dinosaur of remittances, has a market cap over $7B. This is 3.8x Remitly’s $1.8B. Q32021 earnings report indicate Remitly grew 68% YoY while WesternUnion grew 0%. In fact, WesternUnion shrunk in the most important market sectors of North America and Europe. Without these markets, WesternUnion cannot survive. The growth WesternUnion had that offset the North America / Europe pullback is in lower margin markets, and I think WesternUnion’s management is focused on short term wins, smoothing out quarter-to-quarter performance. This is a distraction. WesternUnion won a few skirmishes which other players don’t care enough to focus on ( yet ) , but losing the war. I believe Remitly is positioned to overtake and capture WesternUnion’s market share in a matter of years. It’s a matter of how soon, not if.

WesternUnion understands the writing on the wall and has begun a digital turnaround but Remitly, lead by former Amazon executives, is a tech company first and first foremost. WesternUnion was founded 170 years ago and there will be fundamental company cultural reasons that prevent it from ever being a tech company. For instance, their career page and job postings indicate they are outsourcing software development to India.

There are other players in the space, but I think will be a winner-take most situation, with Transferwise staking Europe, and Remitly staking North America, in the same way Uber and Lyft can co-exist to keep the other competitive.

Capturing incumbent market share is just one of many levers in which Remitly can 10x. Many segments of the remittance market are still untapped. Moreover, the industry itself is consistently growing and shows no sign of stopping.

With remittances alone, Remitly can 10x+. I’ve found some red flags with incumbents including in their balance sheets. Remitly has a much healthier balance sheet and with the recent $85M series F, another large investment from Visa and, of course the $400M from its 2021 IPO, is well capitalized to double down on its remittance business and still have the bandwidth to expand into adjacent financial services while incumbents are busy playing a losing game of catch up. Remittances is a strategic segue into building trust with immigrants, and now Remitly has expanded the scope of its mission to serve an array of other financial services to immigrants. The remittance runway is 10x, but being the premier financial services provider for immigrants is so much bigger that I can’t, in good faith, say whether it is a 20x or 100x opportunity. But first, remittances.

What is remittance?

By some dictionary definitions, remittance is transfer of money. In which case, PayPal, WeChat, Facebook, Steam, World of Warcraft, cryptocurrencies and even the traditional banking system would be remittance providers. However, we typically just call this money transfer.

For all intensive purposes, remittance refers to the transferring of money to one’s home country. These are personal rather than commercial transactions. The demographic is foreign workers and immigrants.

There are significant regulatory barriers to entry that has prevented traditional tech giants and financial institutions from rolling their own remittance services. PayPal acquired Xoom in 2015, the then largest digital-remittance provider. Facebook tried and gave up after facing regulatory scrutiny. Then they tried again under the guise of their cryptocurrency Libra. Alibaba tried to acquire a key remittance player for $1.8B but was blocked by the U.S. government for national security reasons.

History

As long as there have been migrant workers, the need to send money to family back home has existed. Along the silk road, Indian, Arabic and Muslim traders established networks to facilitate the delivery of money over long-distances. This was known as Hawala which in Arabic means trust. In the 20th century, America saw a shift from European immigration to Asia, Latin America and, in recent decades, Africa. Ethnic community after next would form similar informal money transfer networks. This could mean asking someone traveling back to the home country to carry cash with them. After September 11, increased legislation around money laundering and tax evasion means the days for these networks are numbered.

Remittance licenses are required in each country and in some cases like the United States requires a license in each state. This creates regulatory moat for incumbents. The other barrier-to-entry in the digital-remittance space is the R&D costs of developing software. The complexities of the business and adapting to local markets/governments is compounded in software as the platform must integrate with existing, likely archaic, financial systems. The software must be accessible to a wide range of devices and adapted to user locality. For example, Arabic reads right-to-left. This all must be done reliably, at planet scale, while defending against hackers and fraudsters.

Growth of the remittance market

The remittance market is still mostly untapped. The world bank estimates $1.5 trillion of remittance volume in 2020, half of which is still through informal networks without paper trail. Assuming a remittance provider takes 3% commission on these transactions, that is over $45 billion in income. Of course, this bakes in my many assumptions.

The World Bank estimates that half of remittances go through informal and unregulated channels. This makes sense as, historically, WesternUnion was the only official player in town and charged obsessive prices leading immigrants to use unregulated services. It is only a matter of time that this share of the market realizes there are legally-compliant options like Remitly that are trustworthy, affordable, fast and convenient. Why go to dodgy corner bodega to send money, being anxious and hopeful that your money will arrive in a few days or a week, when you can use a mobile app?