Next-generation money transfer service Xoom (NASDAQ:XOOM) priced its IPO at $16 a share, which was above the $13-$15 range, and shares have since surged 40% to above the $22 mark in Friday trading.
Xoom is gunning for a massive market opportunity, which is estimated at more than $500 billion. The dominant players include Moneygram (NYSE:MGI) and Western Union (NYSE:WU), which rely mostly on an extensive distribution footprint of physical locations.
However, this model is subject to disruption. Right now, their customers often have to wait in line, then talk to a service provider (one usually behind a bulletproof window, a double-edged sword that provides security yet invokes a feeling of nervousness). Xoom, however, is putting its chips behind the hope that money senders prefer the convenience of using a website or smartphone to make a money transfer.
The company also has been smart in encouraging customers to use their checking accounts, which means avoiding the high interchange fees of credit cards, in turn helping Xoom to be a lower-priced option than traditional brick-and-mortar operators.
Customers can pick up cash at a local bank or a major retailer, and they also can make direct transfers to banking accounts.
A big competitive advantage for Xoom is its broad distribution, which spans across 30 countries, though the bulk of its transactions occur in Mexico, India and the Philippines.
So far, Xoom’s growth has been torrid. From 2008 to 2012, revenues grew from $14.1 million to $80 million, or more than 50% annually. The company is not yet profitable, however, losing $5.9 million last year — but that shouldn’t be too much of a red flag, as such losses are fairly normal for any firm investing heavily in its own growth.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.