Wise: A Virtuous Cycle That Will Continue To Support Growth

seekingalpha2024-11-21

Wise PLC's robust payment infrastructure and low transaction costs create a strong moat, driving double-digit growth in a large, expanding market.The company's impressive financials include a 19% YoY ...

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AdrianHancu  Investment Thesis Warren Buffett once said, “a truly great business must have an enduring 'moat' that protects excellent returns on invested capital”. That is the first quote that comes to mind when I did my deep dive into Wise PLC (OTCPK:WPLCF) (OTCPK:WIZEY), formerly known as TransferWise. The business is in a truly virtuous cycle of a moat protecting its scaling, in turn further fueling higher growth. Wise’s small but growing share in a huge and expanding market could allow it to continue growing at double-digit rates on all fronts. The ultimate goal of Wise is to allow its customers to be able to transfer $10,000 across currencies for less than $5, when current banks’ rates are around $200-400. Tiny unit cost on greater scale equates to large revenue with minimal cost for the individual user. And Wise is on track. Business Overview According to the 2023 FSB Annual Cross-Border Progress Report, it takes more than a day to process transactions for approximately 46% of B2B and about 33% of B2P global transactions. Around 21% of the P2P transactions take more than a day to process. Around 1% of the B2B and B2P transactions are completed in less than one hour. FXC Intelligence With Wise, 63% of payments were instant (less than 20 seconds) in Q2 FY25 ending 30 September, 83% of the transactions were processed within an hour, 94% within 24 hours. Wise And all this with Wise’s cross-border take-rate decreasing by 8 bps from 0.67% to 0.59% while revenue grew 19% YoY. This is the sign of scaling, significantly boosting the unit cost reduction. It’s also a clear indication that its payment infrastructure is significantly more advanced than traditional banks’, with a handful of the latter partnering with Wise. Wise’s business moat is therefore, undoubtedly, its unmatched payment infrastructure allowing for fast and secure cross-border and multi-currency transactions. Management I found the origin of the business idea rather interesting and it is still reflected in the core of it: its CEO and co-founder Kristo Käärmann, born in Estonia, wanted to send his Christmas bonus he received at Deloitte London to Estonia. He lost from the bonus amount about £500 because of an unfavourable exchange rate, with an additional £15 fee to rub the already deep wound. That motivated Kristo to found with Taavet Hinrikus, a former Skype employee (Skype was at the time a unicorn), Wise (formerly known as TransferWise). He was backed by several investors, including PayPal co-founder Peter Thiel. Wise had therefore a headstart with a team of people that, together, were determined, knowledgeable of the payments infrastructure and with sufficient resources. A strong evidence that the CEO still strongly believes in the company, and that his incentives are in line with shareholders’ interest, is that Kristo still owns a little bit more than 18% of the company. With the company’s $10.8 bn market cap, the CEO is a billionaire - on paper - and most of his wealth is in Wise. That comforts me as a shareholder. Let’s look at the figures related to the business, which further support the bullish case of the stock. The Growth Story in Numbers The interim results for the six months ended 30 September 2024 were truly solid with attractive growth rates on all fronts. Indeed, in H1 FY25 alone, Wise allowed 11.4m people and businesses to move money globally. They moved £68.4bn with Wise, which is an increase of 19% YoY (21% on a constant currency basis). Cross-border (international) volume increased by 19% as well. The number of customers also increased, with a 25% YoY. More active customers that move more money. This shows they are satisfied with the product, and they trust it more as well: they increased their holdings in Wise by 31%, in part because of the interest payments that the company manages to pass on to them. More activity means more income. Indeed, the underlying income increased by 19%, revenue by 19%, after tax profit by a whopping 55% and adjusted EBITDA by 35.1%. The adjusted EBITDA margin also improved by 360 bps. These figures clearly show the company is in full boom and bloom. And these numbers naturally improve the balance sheet of the company. GuruFocus Total current assets of $19.0 bn surpass total current liabilities of $17.9 bn (mainly accounts payable and accrued expense), giving the company sufficient short-term leeway with a current ratio above 1. Wise has also practically no debt nor long-term liabilities and sits on a pile of $1.2 bn in cash, which is pretty large when compared with its $10.8 bn market cap. But the valuation has yet to reflect these impressive milestones and growth rates that were achieved, and this growth stock is therefore particularly attractive. Valuation The stock is cheap. It is trading at a trailing P/E of 20x, down from 27x in March 2024 and 50x in March 2023. The rapid improvement of earnings is making the stock cheaper, although the stock price continues rising since the mid-2022 bear market. Data by YCharts The P/S is also attractive, fluctuating within the 5-6x range since March 2023. Both metrics show a particularly attractive stock given the double-digit growth profile of the company. The revenue is expected to continue growing in the double-digit rates in the next years, and offers an attractive entry point. Compared with peers, the stock is also attractive. PayPal Inc. (PYPL) is currently trading at a comparable 20x but with a significantly different growth profile (single digit revenue growth rate). A more comparable stock is payments provider Shift4 Payments Inc. (FOUR) consistently trading at a PE above 50x since 2022. Wise is significantly mispriced and with a multiples expansion towards 30x to 40x PE, combined with a conservative 15% growth rate, the stock could trade at $15-20 in the next twelve months. And the valuation could be particularly cheap in light of potential growth catalysts that could provide for further upside surprise and support higher double-digit growth rates in the foreseeable future. Growth Catalysts The first growth catalyst is partnerships. Wise welcomed nine new partners, including Nubank (Brazil), Qonto (France) and AbbeyCross (UK) during the period and a new partnership with Standard Chartered. These partnerships have the potential to significantly boost activity on Wise’s infrastructure and the fees perceived by the company. Additionally, they create value by expanding the company’s presence to new geographies and new customer bases. Additional regulatory approvals obtained are also likely to increase the number of transactions processed by Wise. Indeed, the company is now allied to directly integrate into the domestic payments systems in Brazil, Japan (the JPY 1 mn cap has now been lifted to JPY 150 mn per transaction) and the Philippines. Wise is also expanding in India where the company secured approval to further unlock outward transfers, removing a previous USD $5k cap to $250k per transaction now. Last but not least, the Total Addressable Market (TAM) is very large. Indeed, it is estimated that a total of £27 trillion will be moved by people and businesses in 2024. From these £27 trillion, £2 trillion are moved by people (19% CAGR in the last two years). Wise has less than 5% market share. £12 trillion are moved by SMBs (9% CAGR in the last two years) with Wise having less than 1% market share. £13 are moved by large businesses and Wise has yet to tap that segment. These figures show how small Wise still is, despite high-growth rates, and also shows a potential for multiplying revenue in the sector in the next few years. Risk Factors To My Case As for every investment, there are risks. The primary one is competition. There is competition with fintech companies but also with traditional banks. Companies like PayPal (online payment provider) and Revolut (personal banking) are among the most reputed global fintech companies, but none of them focus on Wise’s niche, which is primarily instant cross-border multi-currency transactions with a limited take-rate. Wise is a very small player as I explained in the last section, and if anything the company is in a challenger position more than challenged market leader. There is limited downside given the quality of the infrastructure, the niche focus and the growth rates. Traditional banks with deep pockets are of course also seeking to have instant and multilateral payment systems. But the size of their banking structures, the regulatory restrictions and their costs of operations make it almost impossible for traditional banks to offer similar services and compete with Wise's cross border take rate which has been consistently downtrending below 1%. Wise If anything, traditional banks could prove to be an opportunity rather than a risk: and the recently announced partnerships with several major banks that I mentioned in the previous section seem to confirm Wise’s leading position in the instant, cross-border and multi-currency payment solutions. Bottom Line Wise has an impressive payments infrastructure in place across the world, continues to grow rapidly in a large and expanding market, and turns potential competitors into partners. The company is managed by a competent CEO whose wealth is tied with the future of business (owning 18% of Wise). Wise continues to grow in the double digits in terms of new customers, number of transactions processed, revenue and earnings. The stock is significantly mispriced, trading at an attractive discount relative to historical metrics and competitors. And the growth catalysts are sufficiently numerous to support continued high-growth rates, while the downside appears limited. For all these reasons, I am rating the stock a Strong Buy.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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