Xoom

• The Bottom Line: Xoom is PayPal's international money transfer service, acting as a critical gateway for global remittances, but its value is deeply intertwined with PayPal's larger ecosystem and its ability to fend off fierce competition in a low-margin industry.
• Key Takeaways:
• What it is: A digital platform designed to help people, primarily immigrants, send money to family and friends in other countries quickly and securely.
• Why it matters: For a value investor, Xoom isn't a standalone stock but a key strategic asset within PayPal. Its performance is a litmus test for PayPal's global growth strategy and capital allocation skills.
• How to use it: Analyze Xoom not in isolation, but by assessing how it strengthens PayPal's economic moat, expands its network effect, and contributes to its overall intrinsic value.

Imagine you wanted to send a birthday gift of $100 to a relative across the ocean 20 years ago. Your options were limited and clunky. You’d likely go to a physical agent like Western Union, fill out paperwork, pay a hefty fee, and your relative would have to go to another physical location to pick up the cash. It was slow and expensive, like sending a physical package. Xoom, which is now a service owned by PayPal, changed that process entirely. Think of it as the email to the traditional post office. It's a digital-first service that allows you to send money internationally from your computer or smartphone. With a few clicks, you can fund a transfer using your bank account, debit card, credit card, or PayPal balance, and the money can be sent directly to your recipient's bank account, made available for cash pickup at thousands of locations, or even delivered to their door in some countries. Founded in 2001, Xoom was built on a simple premise: the multi-billion dollar global remittance market—the formal term for immigrants sending money back to their home countries—was ripe for disruption. For decades, this market was dominated by legacy players who charged high fees for a slow service. Xoom offered a faster, more convenient, and often cheaper alternative. The most important event in Xoom's history occurred in 2015 when it was acquired by PayPal for approximately $890 million. This transformed Xoom from a promising, but vulnerable, standalone company into a strategic weapon in the arsenal of a global payments giant. Today, you can't invest in Xoom directly; you invest in it as part of PayPal. Therefore, understanding Xoom means understanding a critical piece of the PayPal puzzle.

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they're on the operating table.” - Warren Buffett
¹⁾

Since you can no longer buy shares of Xoom, you might ask why you should spend any time thinking about it. The answer is that studying a business like Xoom, even as a subsidiary, provides invaluable lessons that are at the heart of value investing.

• Understanding a Business You Can Explain (The Circle of Competence): Xoom's business model is wonderfully simple. It helps people send money from Point A to Point B. It solves a real, tangible human need. This is the kind of business that Peter Lynch would love—it's easy to understand, you can see its utility in the real world, and you don't need a Ph.D. in finance to grasp its purpose. For a value investor, operating within your circle of competence is the first line of defense against making foolish mistakes.
• A Case Study in Economic Moats (or the Lack Thereof): The international remittance industry is a brutal battlefield. The service is largely a commodity; for most customers, the cheapest and most reliable option wins. This creates immense pressure on fees and makes it incredibly difficult to build a lasting competitive advantage, or “moat.” By studying Xoom and its competitors like Wise (formerly TransferWise) and Remitly, you learn to identify industries with low switching costs and intense price competition—hallmarks of a business that may struggle to generate sustainable, high returns on capital.
• Evaluating Capital Allocation by Management: For an investor in PayPal, the $890 million acquisition of Xoom was a major capital allocation decision. Was it a stroke of genius or an expensive mistake? To answer this, a value investor must analyze Xoom's performance inside PayPal. Has it accelerated PayPal's growth? Has it expanded its user base? Has it generated a good return on that initial investment? Your judgment of PayPal's management hinges on their ability to make smart decisions like this one. Xoom is a key piece of evidence.
• The Power of an Ecosystem (Network Effect): The most compelling reason to care about Xoom is to see the power of a network effect in action. On its own, Xoom was just another money transfer service fighting for customers. Inside PayPal, it has the potential to be so much more. It can tap into PayPal's 400+ million active accounts, leverage its trusted brand name, and integrate with its vast payment infrastructure. The key question for a value investor is: does integrating Xoom make the entire PayPal ecosystem more valuable and harder for competitors to attack?

In short, Xoom is a perfect microcosm for learning about business quality, competitive dynamics, and management skill.

Since Xoom is part of PayPal, you won't find a separate stock ticker or financial report for it. Your analysis must be that of a detective, piecing together clues from PayPal's strategy and financial statements to assess Xoom's value.

The first step is to understand the “why” behind the 2015 acquisition. A value investor must always question the strategic rationale for a major purchase.

• The Price: PayPal paid $25 per share in cash, a 32% premium over Xoom's pre-announcement stock price. This premium signals that PayPal saw significant value that the market was supposedly missing. Your job is to determine if that optimism was justified.
• The Stated Goal: PayPal's goal was to accelerate its expansion into international payments and remittances. It was a classic “buy vs. build” decision. Instead of spending years building its own system from scratch, it bought Xoom's technology, licenses, and operational expertise.
• The Synergies: The real bet was on synergies. PayPal believed it could plug Xoom into its massive global network and dramatically lower customer acquisition costs. A Xoom customer sending money home might be introduced to PayPal or Venmo for domestic payments, and a PayPal user might discover Xoom for their international needs. This cross-pollination is the holy grail of a platform business.

Next, you must evaluate Xoom's current competitive standing as part of PayPal. Does it have a durable advantage, or is it just another fish in a sea of sharks?

• Brand and Trust: In financial services, trust is everything. People are hesitant to send their hard-earned money into the digital ether with an unknown company. Xoom's greatest asset is now the “Powered by PayPal” brand. This is a significant, if intangible, advantage that a new startup doesn't have. It immediately lowers the mental barrier for a potential user.
• Scale and Infrastructure: PayPal operates at a massive global scale. This allows it to negotiate better terms with banking partners and spread compliance and regulatory costs over a much larger revenue base. This scale can translate into a subtle but real cost advantage, allowing Xoom to operate more efficiently than smaller rivals.
• Distribution Network: This is the most powerful piece. PayPal can market Xoom directly to its hundreds of millions of users. This is an enormous reduction in marketing spend (what's known as Customer Acquisition Cost or CAC) compared to a standalone company that has to build its brand from zero through expensive advertising.
• Weakness - Low Switching Costs: This is the industry's Achilles' heel. Despite the PayPal brand, a user can switch to a competitor like Wise in minutes if they offer a better exchange rate or a lower fee on a specific transfer. Loyalty is fickle when money is on the line, which keeps a permanent cap on how profitable the business can ever be.

Let's walk through the thought process of a hypothetical value investor named Alex, considering Xoom at two different points in time. Scenario 1: Alex Analyzes Xoom (XOOM) in 2014 As a standalone public company, Alex pulls up Xoom's financial reports. She sees a few things:

1. Rapid Revenue Growth: The company is clearly tapping into a huge market, and revenues are growing at over 30% per year.
2. No Profits: The company is not profitable. It is spending heavily on marketing to acquire new customers and on technology to build its platform.
3. Intense Competition: Alex reads about new, venture-capital-funded startups entering the space, all promising lower fees.
4. Valuation: The stock is trading at a high multiple of its sales, reflecting optimism about future growth.

Alex's value investing checklist raises red flags. The business is understandable, but it lacks a clear moat. The path to sustainable profitability is uncertain, and the valuation seems to be pricing in a perfect future. While she admires the business model, the lack of a margin of safety is too great. She concludes it's in her “too hard” pile and decides to pass on the investment. Scenario 2: Alex Analyzes PayPal (PYPL) Today Now, Alex is analyzing PayPal. Xoom is just one part of the business. Her analysis shifts completely:

1. Finding Xoom's Contribution: She can't see Xoom's specific revenue, but she can read PayPal's annual report (the 10-K). She looks for mentions of “cross-border transactions” and management's discussion of international growth. She sees that transaction volumes from international users are a key growth driver.
2. The Moat Question: Her question is no longer, “Can Xoom survive?” but rather, “Does Xoom make PayPal's moat wider?” She concludes that it does, moderately. By offering a comprehensive suite of payment services (online checkout, peer-to-peer with Venmo, and international with Xoom), PayPal becomes stickier and more integrated into a user's financial life.
3. Valuation Context: The value of Xoom is now just one component of her overall intrinsic value calculation for PayPal, a vastly more profitable and dominant business. The risk is no longer concentrated in one competitive market but is part of a diversified, global payments platform.

Alex's conclusion is now about PayPal as a whole. She might decide PayPal is a great long-term investment, with Xoom being a valuable, growth-oriented component. The example shows how a company's strategic context can completely change its investment profile.

When viewed as a business segment within PayPal, Xoom has a distinct set of strengths and weaknesses that any investor in PayPal must consider.

• Powerful Symbiosis with PayPal: This is the single greatest advantage. Xoom gets access to a colossal, built-in customer base, a trusted global brand, and a world-class technology infrastructure. In return, PayPal gets a strong foothold in the massive remittance market and another service to deepen its relationship with users.
• Massive, Secular Growth Market: The global remittance market is enormous and tends to be resilient even during economic downturns. As globalization and migration continue, the need for cross-border money transfers will only grow.
• Data and Cross-Selling Opportunities: Every Xoom transaction provides PayPal with valuable data about global payment corridors. This data can be used to improve services, manage risk, and identify opportunities to cross-sell other PayPal products, such as business accounts or credit services.

• Brutal, Commodity-Like Competition: This cannot be overstated. The industry is defined by price wars. Specialized, tech-savvy competitors like Wise are relentless in their focus on lowering costs and are often seen as the cheapest option. This puts a permanent ceiling on Xoom's profit margins.
• Regulatory Complexity and Risk: Operating in over 160 countries means navigating a labyrinth of different financial regulations, anti-money laundering (AML) laws, and geopolitical risks. A sudden change in rules in a key country could disrupt business overnight.
• Foreign Exchange (FX) Volatility: Xoom's business is inherently exposed to the volatility of currency exchange rates. While the company uses hedging strategies to mitigate this, sharp, unexpected currency swings can still impact revenue and profitability. It's a risk factor that is largely outside of management's control.

• paypal
• economic_moat
• network_effect
• switching_costs
• capital_allocation
• fintech
• margin_of_safety
• circle_of_competence