Xoom's Global Expansions Look Good, Competition a Drag

We issued an updated research report on Xoom Corporation XOOM on Aug 28, 2015.

Last month, the company reported second-quarter loss that compared unfavorably with both the Zacks Consensus Estimate and year-ago earnings, mainly due to high expenses.

Xoom is set to be acquired by PayPal in the fourth quarter of 2015. The transaction is valued at $25 a share in cash, which represents a premium of 21% over Xoom's closing price of $20.70 on Jul 1, 2015. The deal is subject to shareholders' approval. Xoom will operate as a separate service within PayPal after the completion of the transaction.

Xoom provides its customers with convenient, fast and cost-effective money transfer and bill-payment solutions. These, in turn, help it to retain active customers as well as gain new ones, thereby resulting in significant rise in gross sending volume GSV. The company's service enhancements allowed it to reach more than 1 million active customers in 2014. The active customer count further increased in the first half of 2015 on the ease of mobile money transfers.

Xoom's incessant efforts to enhance customer experience allow it to reach in new markets and strengthen its base in existing ones. The company has expanded to China, Pakistan, Vietnam, Philippines, El Salvador, Austria, Belgium, Greece and Portugal so far in 2015.

Xoom remains technologically sound when it comes to providing enhanced services to its customers. In Jul 2015, the company launched a new enhancement to its mobile payment portfolio – Xoom Mobile Reload – to expand its offerings to customers. This service enables customers to send airtime credit online from the U.S. to prepaid mobile phones across 22 countries, which should help in increasing transactions via mobile devices.

However, significant operating losses are headwinds. Additionally, increased competition and gradual decline in the year-over-year percentage growth of additional customers are likely to weigh on the percentage growth of revenues in the future, thereby pressurizing margins.

Moreover, as a significant part of the company's revenues are derived from foreign exchange spreads on transactions where the payout currency is other than U.S. dollars, Xoom faces headwinds from foreign currency fluctuation.

Xoom has also been facing litigation issues that challenge its financial strength. In Jan 2015, the company was sued in a putative class action lawsuit. Per the case, Xoom was charged of violating federal securities laws by misrepresenting or omitting information in the offering materials distributed regarding the initial public offering. Legal hassles not only drain cash and weigh on a company's financial position, but also tarnish its goodwill and mar investor confidence.

Xoom currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the financial transaction services space are Equifax Inc. EFX, Global Payments Inc. GPN and JetPay Corporation JTPY. All the three stocks hold a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>