One of the more interesting small cap stock on the ASX is Raiz (ASX:RZI) which is basically an app aimed at getting millennials to regularly invest small amount of money into the stock market. I recently became more interested in the business (and bought back some shares, at slightly above the current share price of $1.70) after the company generated positive operating cashflow in the September 2021 quarter.
As a result, I took the opportunity to have a phone call with co-CEO Brendan Malone, to find out more about the genesis of the business, and what he sees for the future. In particular, I was interested in better understanding whether the recent boardroom fallout might be a red flag (or not).
To cut to the chase, I really wasn’t able to get any information about the disagreement between the co-CEOs Brendan Malone and George Lucas on one side, and the now departed chairman on the other side. However, that’s not really too surprising because in acrimonious situations there are often threats that people will sue each other for defamation.
However, I really was able to get a better impression of Brendan Malone himself.
First of all, he shared the founding inspiration for the company. He told me about how, having retired from a high flying career in finance, he had a childhood mate call him up and ask him what to buy when he got $10k from his grandma. Because he grew up in Newcastle, his mate was inclined to simply buy BHP shares. Obviously, this is a bit suboptimal and generally speaking people are better off starting with a diversified investment, such as any of the ETF-based solutions that Raiz now offers its clients.
While this sort of story is generally unimportant, it has to be viewed in the context that Brendan Malone obviously has a passion for helping people take control of their finances. I pushed him on some of the issues around higher fees, and about the fact that Raiz seemed suboptimal to me.
However, where is passion lies, and what I agree with, is that the process of getting people to “round up” their transactions and save little-by-little, can be very helpful for people with low financial literacy or who struggle to save. Basically, Malone seems genuinely animated by Raiz’s mission to break down the barriers to investing (for people who don’t invest already).
For example, when clients put money in their Raiz account, if they want to withdraw their money, it takes 3 days, so they can’t simply have a moment of weakness in the pub and use the account to buy more beer. He said Raiz “is a savings tool” because “It creates forced savings”. And he further elaborated that he does not “agree with the BNPL models” because they are “about the instant gratification.
Now obviously, every CEO is going to have a decent marketing spiel but I also got the sense that Brendan isn’t too guarded. For example, he did express some frustration about how the market was (sometimes) too obsessed with the company reaching cashflow breakeven; though that was my impression, not a quote.
How Should We Measure Raiz Going Forward?
One of the key things I wanted to ask Mr Malone was what measures he uses to track the progress of the company, given that he’s obviously not very focussed on free cash flow, right at the moment.
He said that the number of active customer is the key driver of valuation because it provides us with recurring monthly revenue.
He said that overall positive cashflow is not the current focus because they want to use the positive cashflow from the Australian business to fund business growth in first Indonesia and Malaysia, then subsequently Thailand and Vietnam.
Given the nature of the business, Raiz needs about $5m in regulatory capital, but it has about $19.5 million in cash after recently raising capital at $1.50 per share. Brendan Malone said that the excess capital could be used for acquisition or more aggressive marketing if the company has the right opportunities to increase spending.
We spoke a little bit about how the company could spend on marketing. Personally, I think casting Raiz as the “anti BNPL” app might be a really good way to go. I have spoken to multiple friends and acquaintances who know someone in their lives who has overspent on BNPL and faced financial hardship as a result. I think having “social media beef” with BNPL will only alienate people who are big users of BNPL (and therefore unlikely to become Raiz investors), but it should help attract more Raiz users (who may not have heard of the brand).
Obviously the secret sauce here is conflict, which then elevates this kind of guerilla marketing on social media. There’s upside here in my view, but in the meantime Raiz seems to be doing a decent job without my marketing tips!
At the end of the day the key take-home was that Raiz is focussed on bringing financial literacy to a new generation and that is a mission I can get behind, even if the fees are a bit high, because it will provide a net benefit to its target audience.
Please remember that these are incomplete personal reflections about stocks by author. I own shares in RZI, and will not sell them for at least 2 trading days after this article, though I retain the right to buy more whenever. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.