Most articles talking about the financial technology (aka fintech) sector focus is mostly on young, disruptive companies turning over the old guard. However, many of the traditional finance players are adopting technology and using it to transform their way of doing business.
A classic example of this is MoneyGram International (MGI, Financial). The company is one of the largest cross-border money transfer companies and focuses on a network of physical locations operated by local agents. Cross-border money transfer businesses are often perceived as an outdated concept and shareholders do not prefer to invest in dying industries. However, MoneyGram is innovating heavily in order to stay competitive through its launch of MoneyGramOnline, a full-fledge fintech business with an orientation towards digital payments. It is slowly moving away from its legacy agent-based money transfer model. This is also why the company has attracted strong takeover interest over the past couple of years.
Digital remittances business
Most immigrants and migrant workers send money back to their families in their home countries. These remittance transactions have typically been conducted in cash transfers, sent from a retail store in the United States such as Walmart (WMT, Financial) and picked up in the receiver's country at a bank or retail store.
However, this system is changing gradually as the world moves away from cash towards digital payments, where MoneyGram intends to be a key facilitator. The company started its first digital push in 2018 with its latest MoneyGram mobile app launch. The app's availability has grown enormously in just a few years as it allows senders to fund transactions with their bank accounts or debit cards with the option to let the receiver pick up the amount in cash or having the money deposited straight into their own bank account.
Another reason for its popularity is the growing adaptation of smartphones and developing financial systems in various countries promoting digital payments. In addition to peer-to-peer money transfer, they have established partnerships with other financial companies in order to enable them to use MoneyGram's payment infrastructure to transfer money for their own consumers. This B2B model is typically known as MoneyGram-as-a-Service. Recently, the company has announced partnerships with nine companies, including Sigue, a rival money-transfer firm, and Coinme, a cryptocurrency service.
If you see the annual transaction report of the U.S., you will find that digital remittances now account for over $16 billion in annual transaction value, which is almost 29% of the total transaction volume. Moreover, the digital remittance volumes are increasing at a double-digit rate. Overall, MoneyGram is well-positioned for the industry's future with its robust offering for digital remittances.
Recent financial performance
For its most recent quarter, MoneyGram reported a mixed result with a revenue outperformance but an earnings miss.
The company reported revenue of $329.30 million for the period ended June 30, which implies a 17.69% growth as compared to the $279.80 million in revenue reported in the corresponding quarter of 2020. The company beat the analyst consensus estimate of $321 million. It reported phenomenal digital transaction growth and its digital revenues account for nearly a fifth of the total top-line of MoneyGram.
The company’s revenues translated into a gross margin of 46.04% and an operating margin of 6.98%, which were lower than in the same quarter of last year.
MoneyGram reported a net loss of $11.10 million, and its adjusted earnings per share (EPS) of 1 cent were marginally below the average Wall Street expectations. The company consumed $17.80 million in the form of operating cash losses in the quarter, which is not a great sign.
Potential acquisition
MoneyGram has been in the news lately because it has drawn takeover interest from Stellar Foundation and Advent. The Stellar Foundation is known to support the Stellar Network for blockchain-based payment services and sees particularly strong synergies in acquiring one of the largest remittance agencies in the world. Stellar is partnering with one of the largest global private equity funds, Advent, which is known to carry out buyouts in many different countries and sectors.
It is difficult to evaluate MoneyGram as a potential merger arbitrage opportunity for traders as the company has been the subject of so many prior takeover rumors. Last year, its biggest rival and another traditional remittance agency player, Western Union (WU, Financial), had been interested in acquiring the company. Also, in 2017, Chinese financial company Ant Group, which is partly owned by Alibaba Group Holding (BABA, Financial), announced its interests in acquiring MoneyGram International. However, the deal fell apart as United States regulators rejected it on national security concerns.
As per Bloomberg reports, multiple cross-border payments companies have shown an interest in acquiring MoneyGram, but so far, no deal has panned out. Whether Stellar and Advent can be successful in their acquisition attempt remains to be seen.
Final thoughts
As we can see in the above chart, MoneyGram's stock has been on an upward trajectory for the past few months, and the acquisition rumors have also contributed to the recent rise. The company’s digital business appears to be a unicorn stuck inside the legacy business, which is the reason why the company is trading at a ridiculously low price-to-sales multiple of 0.63.
The company is doing a lot of hard work around its digital transformation. It has renovated its IT infrastructure, customer service and compliance operations in order to increase transactions through its digital platform. I believe that that the markets are undervaluing the company's digital business and the stock could witness a huge spike if the acquisition goes through, as a buyout would almost certainly represent a significant premium over the current market price. Even if the acquisition does not go through, MoneyGram is still reasonably valued and could see strong digital growth, which could act as a catalyst for the stock price.
