FLYW 2.9.26
Analyst 1
I'm very aligned with you on the quality of Flywire's business. When you speak to customers, and I've only spoken to educational customers, not the healthcare customers or other verticals, it's similar. It works, and they’re active proponents of Flywire. Flywire keeps getting more and more integrated within the system. The one thing that almost blew my mind as a fintech investor is that Flywire is actually increasing its take rates every year. Whereas in most fintech, you just talk about managing take-rate compression.
Analyst 2
The one challenge with that is that they're expanding more into domestic payments, so it can get lost a little bit. Because the mix shift is ongoing, you'll get a lower take rate for processing domestic tuition payments than for international ones. So that’s one caveat.
Analyst 1
One other thing that became very clear is that universities don’t want to switch. It's different from an enterprise setting where you have procurement departments whose core job is to save every last penny. In the university setting, that doesn't apply. As long as Flywire continues to satisfy customers' core needs, which it does, there is no reason for them to switch. It’s a harder sell, but Flywire is probably the only company sending representatives to talk to university people about this, so they’re first in line whenever the university is trying to solve a problem. As you mentioned, other people in their network are talking up Flywire. When they sign on the customer, it’s extremely sticky. They’re not going away, and their net retention rates will remain very high. For all of those reasons, it's a very good asset.
Are you a hedge fund or a long-only shop?
Analyst 2
We're a hedge fund, long-short.
Analyst 1
Okay, so you would understand this. Essentially, Flywire and Remitly are stocks getting traded on immigration news. We don't do charts, so it doesn't matter for us, and this is a fundamentally great value. But specifically for Remitly, when I looked at the shareholding, it’s just a hedge-fund hotel. There are very few fundamental buyers of the stock who are long-term holders. When I know my stock price will be driven by how these guys think, it's a very difficult uphill battle.
That makes me a little cautious. However, when I look at Flywire's holder list, it seems to have decent long-only participation as well, and fewer hedge funds than I see on the Remitly list. The percentage of ownership held by hedge funds that will trade in and out of Flywire's stock is lower than for Remitly. That actually makes it pretty good.
Analyst 2
Obviously, the stock price can dictate what we do with the stock, but I think ultimately this company will get acquired at some point. We're willing to take the position when the sentiment is at its lowest. Between the company being a software company and a payments company, and then the immigration stuff, you combine that and look at their actual results over the last three quarters, which are blowing out numbers every quarter.
I think if the sentiment were to turn, it could be pretty powerful for Flywire, given the numbers are there. It's not like they're struggling with the numbers. They're putting up a fairly beatable bar and blowing past it. They're putting out pretty conservative guidance posts.
You talked about being cautious. I'm reading the same sell-side reports saying the stock is disconnected from fundamentals, completely insane, and then rating it a "Hold" based on narrative. We recognize this is silly, but we're putting a hold on it because of the narrative. How do you get out of that box? What things are you looking for that would make you get more positive? What definable catalyst are you watching for that would make the risk-reward good enough now?
Analyst 1
To be very candid, the only thing for Flywire that I’m looking for is what’s happening to international student visas, and the number that’s being published, not only for the US, because Flywire's major geographies are hit with similar international student concerns. Apart from the US, you have Canada, Australia, and the UK.
Analyst 2
Right, they call them the "Big Four."
Analyst 1
Yeah. I come from India originally and immigrated to the US for school. Obviously, many people in India are trying to make their decision. The decision parameters have again become India and China, the two big buckets of sources for international students. In the US, Canada, Australia, and the UK, there has been negative sentiment toward international students. Students are finding it harder to get jobs after college, and this has played out for a significant period.
It started happening with the Trump 1.0 era in 2016. The negative sentiment started in the US and has consistently worsened year-on-year. There are many businesses in India whose core job is doing admissions consulting for US business schools or admissions in general, and their businesses are severely impacted by this because the demand for Indian and Chinese students to come to the US, UK, or Canada has gone down significantly.
At the same time, because both China and India have youth unemployment problems, the talent that was the core customer segment of Flywire, the top 10-15% of the talent pool of those countries, has much better jobs available in their home countries today than they had 10 years prior. Since I graduated from my university in India, the salaries for comparable jobs, like a McKinsey BA salary in India, have increased 4x over the last 10 years. In China, it has essentially hit parity with US numbers.
Someone going to Columbia undergrad and joining the New York office is making the same comp as someone going to a Tier 1 college in China and joining the McKinsey Shanghai office. You feel unwelcome in these countries, and previously, you immigrated because in India, a US BA would be getting 10x the salary. But since salaries in India have quadrupled and salaries in the US have probably increased 25-30% over the last 10 years, the differential has become much lower. In PPP terms, it's actually better now in India to take up the McKinsey job. In absolute terms, it’s better to take the Chinese job. In PPP, it's about 2x better to stay in China and complete your college at a Chinese university if you can make it to McKinsey in China.