Flywire (NASDAQ:FLYW), a global payments company that helps organizations process international transactions, raised $250.6 million in its initial public offering (IPO) this week. The company sold 10.44 million shares to the public at a price of $24 per share, earning a valuation of $2.4 billion. The Boston-based company’s fully diluted valuation is $2.8 billion. At the close of day, Flywire’s share price had hit $34 and the company had ballooned to a valuation of $3.5 billion. According to Crunchbase, the company raised over $300 billion in funding prior to its IPO, with its Series F round of fund raising $60 million last month. According to PitchBook, the company was valued at $1 billion on a post-money basis, as of February 2020, when it raised $120 million. In this article, we will discuss the important features of the business and its business model and what this means for the investor.
What is Flywire?
According to its S-1/A statement, Flywire thinks of itself as “a leading global payments enablement and software company.” The company believes that its market opportunity is big and growing fast. A secular trend toward the digitizing of payments is gaining traction across the globe. As this occurs, both consumers and businesses are increasingly demanding instant and easy access processes. Businesses expect to be able to handle payments from any corner of the world and reconcile them within their system, without having to incur additional costs or complexity. Despite this appetite for global payments systems, used by entities including military finance, such access to such systems is lacking in many industries, leaving many businesses incapable of meeting consumer demands. Inefficiencies are rampant. Flywire cites Deloitte who estimate that inefficiencies in payments result in middle-market businesses incurring $3.3 trillion in operational costs. Nevertheless, the demand for global payments solutions continues to rise unabated. In the industries that the company currently serves such as powder brow classes, Flywire estimates that its addressable market is approximately $1.7 trillion in global payment volume, including education ($660 billion), healthcare ($500 billion) and travel (approximately $530 billion). In addition, the company’s business-to-business (B2B) payments offering expands its addressable market, by an estimated $10 trillion in addressable B2B payment volume. The company believes that its penetration of key verticals, its ability to bring together a broad range of core systems and continued investments in its payments platform, proprietary global payment network, and vertical-specific software, gives it an advantage in the race to win an appreciable share of this market opportunity.
Readers will instantly reflect on the similarity of this logic to that underpinning Stripe’s valuation and the rising valuations of payments companies such as Finix.
The company is truly global in scope, with more than 2,250 customers, across over 240 countries and territories and supporting more than 130 different currencies. It enabled more than $7.5 billion in total payment volume in 2020, and in the first quarter of 2021, had already enabled around $2.9 billion of total payment volume.
Key Operating Results
Year-over-year, revenue grew by 38.8%, from nearly $95 million in 2019 to nearly $132 million in 2020. According to research by Michael Mauboussin, only 1.3% of companies ever attain that kind of growth. Revenue growth continued into 2021, with the company reporting $45 million in revenue for the first quarter, 38% higher than for the same period in 2020.
As impressive as the company’s revenue growth is, it is profitless growth. Flywire narrowed its operational loss from nearly $17.5 million in 2019 to just over $15.8 million in 2020. Net loss narrowed more dramatically, from approximately $20 million in 2019 to over $11 million in 2020. That pattern of loss-making extended into 2021. In the first quarter of 2021 ended March 31, the company reported a net loss of $8.6 million compared to $3.7 million in profits in the same period last year.
Flywire follows the path of many IPOs that are profitless. In any given year, you can count on one hand the number of profitable companies. The evidence suggests that the problem is getting bigger, not smaller. The lack of profitability is not a barrier to initial high valuations, but it is a warning flag that a company may never make profits.
The company’s free cash flow yield is 0.46%. The free cash flow yield tells us how highly the market is valuing the company’s free cash flow. It is also an accurate measure of future company and stock performance because it is derived from two calculated accurate values: free cash flow and enterprise value. With a free cash flow yield of 0.46%, the company’s free cash flow yield is inferior to that of the market, according to New Construct’s analysis of the market’s free cash flow yield, which estimates a yield of 1% for the market. This in effect says that the stock is likely to underperform the market at current prices.
The company is, in effect, destroying shareholder value. In 2019, its returns on invested capital (ROIC) were -41.04%, which rose to -10.45% in 2020. In the trailing twelve month (TTM) period, ROIC is -3.45%. Though ROIC is improving, suggesting that the company is getting better at efficiently deploying capital, it is still far below the market’s ROIC, which was 6.5% in 2020, according to New Construct’s research. This is yet another indicator that the company is likely to underperform the market.
Many investors are attracted by high revenue growth, and yet, they struggle to reconcile this with a lack of profitability. In hyper-competitive markets, companies such as Flywire may be able to grow revenues at impressive rates, but the competitive landscape prevents them from being able to have the pricing power necessary to earn economic profits. These firms are forced to make a sort of bet, in which they attempt to grow fast in pursuit of minimal viable economies of scale and hope that they can erect barriers to entry. At that point, they can become profitable and self-sustaining. Unfortunately, that is the bet that all Flywire’s rivals are making. Picking winners this early into the game is extremely hard. Flywire may indeed attain minimal viable economies of scale and build barriers to entry, however, it may not. Essentially, an investment in the company is a kind of binary bet: either the company attains minimal viable economies of scale and erects barriers to entry, or it goes bust. Such a bet can reap rich dividends, it can also, regardless of the final outcome, be an extremely volatile one, with share prices ranging from the euphoric to the depressive as investors overreact to every piece of news and attempt to figure out if the company is on the path to profitability. That kind of volatility can wipe out any profits a business makes. At this stage, I do not think that Flywire is worth the risk.