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Bull of the Day

Think of companies that changed their industries with disruptive technology. Certainly Apple, Google (GOOGL - Analyst Report), and Netflix (NFLX - Analyst Report) immediately come to mind. And there are hundreds of tech entrepreneurs and their VC backers hoping they are running the next game-changing start-up.

A few smart people believe Xoom Corporation (XOOM - Snapshot Report) is a classic disrupter in the electronic money transfer business, ready to steal market share from Western Union (WU - Analyst Report). Xoom provides payment services which consist of cash pickup, bank deposits and home delivery, sending money online directly to bank accounts and receiving money in local currency or US dollars. The company offers services through xoom.com and walmart.com over the Internet, mobile devices or tablet.

One those smart folks who likes XOOM is Mario Cibelli, founder of the small cap investment firm Marathon Partners. His name has an odd ring to it, doesn't it? In fact, Cibelli, who was featured in the May 26 edition of Barron's, got his start in stock picking after college with Mario Gabelli of Gamco Investors. More on Cibelli in a moment.

Secure Payment Services Are Hot, Mobile is Hotter

Zacks Rank followers know this industry has been full of money with highly ranked stocks like Heartland Payment and Alliance Data Systems (ADS - Analyst Report) delivering doubling returns in the past 18-24 months. The bigger companies like Alliance Data, and Visa of course, have the enterprise business wrapped up where large-scale, robust technology is king.

But newcomers like XOOM are able to carve niches appealing to consumer tastes and preference for mobile, on-the-go transactions. In May, analysts at Baird described the company...

"Xoom is a classic disrupter model online, with a faster, cheaper and easier alternative to legacy money transfer companies. Xoom has a strong and passionate management team, large addressable market, and strong technology foundation."

Faster, cheaper, and easier sounds like a winning formula for consumer engagement. But when does this value proposition turn this stock's triple-digit P/E into a realistic growth story? It will depend on management's execution of the their strategic plans, especially in emerging markets.

Moving the World's Money

To see what Xoom is up against, it helps to understand the evolution of the Goliath in their industry. Western Union has annual revenues exceeding $5.5 billion, which coincidentally, is the figure that Xoom claims as their total money transfers in 2013.

In continuing efforts to adapt beyond its brick-and-mortar model, Western Union is increasing its investments in high-growth electronic channels to build a world-class customer experience. These efforts are propelling rapid growth in digital, account-based money transfer, and mobile banking.

Online, westernunion.com money transfer transactions grew more than 40% in 2013, while transactions for electronic account-based money transfer through banks surged over 50%. Management is targeting $500 million in revenues from the digital business (westernunion.com/mobile) by 2015, which implies a 60% CAGR revenue growth through 2015.

Xoom has less than 10% market share in current markets, and has barely scratched the surface of the money transfer market globally even as they do business in 31 countries. According to Baird analysts who recently met with management, the company is focused on four primary growth drivers:

1) expand share in existing corridors (U.S. to India/Philippines/Latin America), with the goal of reaching 50%+ share

2) add new markets from the U.S., most notably China, which would add $20 billion to the Total Addressable Market (TAM)

3) add new origination markets, such as Canada, UK, Australia, western Europe, doubling TAM

4) adjacent Services, such as Bill Pay (launching later this year) and commercial services leveraging Xoom’s instant transfer network

The analysts conclude that they believe it is reasonable to expect Xoom to double its market share within 3-4 years, which suggests roughly 25% revenue CAGR.

Follow the Money

This all sounds great. But I run a portfolio that "follows" the real money moves of investment fund managers who do their homework. That's why I was pleased to learn of Mr. Cibelli and his fondness for Xoom as his number 2 holding, comprising 12% of his fund. From the Barron's story...

"Cibelli's strategy is to find stocks he believes have the potential to double in three to five years -- regardless of economic or market conditions. He likes companies with disruptive, usually Internet-based business models that have the potential to change industries."

And he has proven he knows how to pick these companies. He turned a $10 per share purchase of a little disrupter called Netflix into a ten-bagger between 2004 and 2011. And he bought it again around $75 in 2012 and cashed out last year over $200.

He is certainly not the largest holder of XOOM shares with less than $300 million AUM. But he is committed. In Q1 he more than doubled his stake from 400,000 shares to 860,000. Here is his rationale...

By 2017, he expects "pre-tax earnings of the debt-dependent company will have risen to $80 million -- from less than $10 million this year -- and XOOM will fetch 20 times pre-tax earnings."

I am also happy to report that the giant fund Capital World Investors, with $360 billion AUM, just started a new position in XOOM with the purchase of 3 million shares in Q1. Needless to say, I am with Cibelli and Capital World and not least because I see the appeal of XOOM as an acquisition target with its strong platform and a sub-$1 billion market cap.

Disclosure: I own shares of XOOM for Zacks Follow the Money Trader.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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