Shareholders of Flywire would probably like to forget the past six months even happened. The stock dropped 37% and now trades at $12.37. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Flywire, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Flywire Not Exciting?

Even with the cheaper entry price, we're cautious about Flywire. Here are three reasons why we avoid 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 62.9% gross margin over the last year. That means Flywire paid its providers a lot of money ($37.13 for every $100 in revenue) to run its business.

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 Losses Sound the Alarms

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.

Flywire’s expensive cost structure has contributed to an average operating margin of negative 1% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Flywire reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Final Judgment

Flywire isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 2.4× forward price-to-sales (or $12.37 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

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