Flywire has been treading water for the past six months, holding steady at $13.28. The stock also fell short of the S&P 500’s 5.6% gain during that period.
Is now the time to buy Flywire, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Flywire Not Exciting?
We're cautious about Flywire. Here are three reasons there are better opportunities than FLYW and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Flywire, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Flywire’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.1% gross margin over the last year. Said differently, Flywire had to pay a chunky $39.85 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Flywire has seen gross margins decline by 1.2 percentage points over the last 2 year, which is poor compared to software peers.
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Flywire’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, Flywire’s operating margin rose by 3.4 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 1.9%.
Final Judgment
Flywire’s business quality ultimately falls short of our standards. With its shares underperforming the market lately, the stock trades at 2.3× forward price-to-sales (or $13.28 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Flywire
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