Wise Plc. is a technology company that provides cross border money transfers. The company, formerly known as TransferWise, listed on the London Stock Exchange in July 2021 by direct listing.

Wise’s mission is to build money without borders, making transfers instant, convenient, transparent and eventually free. The business has been growing steadily, has a good rating from customers and is backed by some high-profile investors such as Richard Branson and Andreessen Horowitz.

Wise shares are currently down -30% from their 52-week high after some inside selling and revenue guidance from the CEO.

While the company has shown impressive revenue growth to date, Wise’s mission to cut the cost of international transfers to zero means success will depend on the company reaching scale.

Numbers

Wise currently serves 10 million customers around the world and charges a small fee for every transfer processed on its platform.

Revenue is therefore a function of the number of active customers, the volume of each customer and the fee charged for each transaction. As the cost of transfer gets lower and lower, the business depends more and more on volume in order to sustain revenues.

However, the lowering of transfer costs is also customer-centric and helps sustain a flywheel effect. Increased customer volume leads to increased profits that leads to increased investment.

Investment in technology, marketing and engineering helps lower transfer costs further leading to better customer experiences that drives more volume and more scale.

As shown below, revenue has been growing steadily with Wise reporting £421 million GBP for the 2021 full year.

Based on outstanding shares of 994 million and a share price of £8, the company is valued at around £7.9 billion GBP and so trades at around 19 times last year’s revenues.

Looking at the company’s financials and key metrics you can see there are encouraging upward trends across the board:

The Problem With International Transfers

The reason for Wise’s existence is because the current model for cross border payments is broken. The typical bank takes 2-5 working days to process an international transfer which includes hidden fees and exchange rate mark-ups.

Traditional banks and even tech firms like Paypal like to advertise their transfers as free. The truth is they use wide currency spreads that take the cost of transfers up to as much as 6%. Meanwhile, only 4% of bank customers (according to Wise) know the full cost of sending money abroad.

According to the World Bank, the average total cost of remittance in 2020 was 6.51% of the transfer value. On Wise, the average cost of an international transfer is just 0.69%. Furthermore, transferring money on Wise is fast. 38% of transfers on Wise arrive instantly, 62% arrive within the hour and 83% arrive in under 24 hours.

Personal Experience

My own personal experience with Wise backs this up. As a UK citizen who lives in New Zealand and is paid in US dollars I need a convenient way to receive funds. With Wise, I was able to set up a US dollar bank account in under 30 minutes then receive US dollars instantly into that account.

That money was then transferred to my New Zealand bank account in less than 4 hours at a cost of transfer of 0.67%. If I had used a traditional bank for this transfer the cost would have been in the region of 3-4% and would have taken significantly longer. If I had used Paypal the cost of transfer would have been around 2.5%. In other words, for a transfer of $10,000 I am $352.88 better off using Wise than I am Paypal. That’s a significant chunk of change that I’d rather keep in my pocket than give to Paypal.

Wise gives freelancers and businesses around the world the ability to receive US dollars (or other currency) and convert them to their local currency cheaply and quickly.

Investment Risks

There are some key risks to be aware of before investing in Wise. The first risk is competition. Everyone knows that the current model for international transfers is broken. To have to wait 5 days and pay 6% on an international transfer is simply unacceptable in 2021.

As a result, there are no shortages of companies trying to solve this problem. Facebook recently announced it was setting up a digital wallet to allow faster transfers. Paypal, together with Venmo, is a $237 billion giant with deep pockets to tackle cross border payments. Meanwhile, traditional banks, themselves, may invest in new technologies that will enable them to compete on international transfers too.

Cryptocurrencies, themselves, were created partly to reduce the friction of peer to peer payments and should therefore be seen as another potential risk to Wise.

While these and other competitive threats exist, less reputable services like MoneyGram International and Western Union could well be the losers as this space develops.

Wise, on the other hand, has put a lot of work in behind the scenes to build its own global payments system that connects, banks, institutions and local payment networks around the world. So far, no other company has shown itself able to compete with Wise based on cost or speed. This allows Wise to drive customer satisfaction and build a strong company brand.

A rising interest rate environment could also favor Wise it would allow Wise to make additional revenue from held funds while keeping transfer costs low.

Customer feedback on Wise is overwhelmingly positive and 67% of new customers come through word of mouth. The company scores 4.6/5 on TrustPilot and has a 4.8/5 rating on the Apple App Store. Culture, community and sustainability are also key principles at Wise and the company scores a solid 4.4 rating on Glassdoor.

The second key risk is valuation. At 19 times revenue and 72 times adjusted EBITDA, the stock is not cheap even though shares have fallen 30% since September. These numbers look slightly better when compared to growth rates. Revenue growth clocks in at 39% since 2020 meanwhile profits before tax are averaging 78% growth over the last 3 years.

Theoretically, though, if Wise gets to a point where it can offer cross border payments for free then Wise won’t make any money. Therefore investors need to hope that Wise achieves large scale and finds alternative ways to support revenues.

Recent Share Performance

Much of the recent underperformance has to do with the company’s Q2 trading update where CEO Kristo Kaarmann guided for future revenue growth in the ‘low to mid 20s’.

Investors were likely expecting higher growth than that given recent growth rates have been closer to 40%. This would have caused investors to reassess their valuation models.

For example, when Wise was priced at £10 per share, the expected CAGR would have been only 10% annually based on a future 10x revenue multiple in 10 years time and 20% revenue growth.

Now that the share price has come down to £8, a 10x multiple with 20% revenue growth implies a CAGR of 12.61%. Meanwhile, a 25% revenue growth rate would likely give an investor a CAGR nearer 17%.

My feeling here is that Kaarmann is happy with slow and steady growth and may be downplaying expectations. All the data I have seen is pointing in the right direction and I would not be surprised to see revenue growth come in slightly above expectations. That would likely lead to another rerating and share price gains.

Wise website data is also strong with over 17 million monthly visits. The company has done a good job of search engine optimization and receives a high level of organic (not paid) traffic:

Conclusion - What’s Going On Here?

Wise shares are down -30% from their 52-week highs after company guidance failed to meet expectations. Investors are not yet confident that Wise will be able to achieve enough growth or scale to satisfy the current high price multiple.

Wise’s mission to take international transfer costs down to zero also means there comes a point where even stellar customer numbers do not improve bottom line earnings.

However, it’s clear that Wise has built a strong product that customers love. Focusing on customer satisfaction is surely the right path and for the moment at least, the Wise flywheel is ticking along smoothly.

Competition in this sector will be fierce but Wise has a chance to grab a significant share of a large industry. (Global cross-border payment flows are expected to reach US $156 trillion in 2022). It would be nice to get the shares a little cheaper. But at a valuation just under £8 billion, the company is worth backing. I have therefore taken a small position.

Conviction: Medium.

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Disclosure: I/we are long WISE.L. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.