To The Moon

$WISE PLC(WISE.UK)$

Let’s discuss Wise, the UK-based payment company. There lot of commented about Wise, and someone mentioned it as a notable company growing quickly in the cross-border payments sector. In this articles, I’ll explain why, despite its growth, I’m not a fan of this industry.

First, let’s pull up some key stats about Wise. It’s not a small player, with a market capitalization of around $12 billion. Looking at its stock price, it’s relatively affordable compared to US-based companies. Now, let’s review Wise’s description to understand its business model and why I have reservations about this sector.

Wise is a currency conversion platform that leverages a peer-to-peer network to reduce transfer costs. It primarily serves private clients and small to midsize enterprises. I have a Wise account myself—it allows users to receive payments through local accounts in different jurisdictions. Wise offers faster and cheaper currency transfers compared to traditional banks. Recently, the company has expanded its services, including issuing debit cards and enabling customers to invest in various products.

Wise had a strong IPO in 2021, during a period of abundant liquidity. Its revenue and net income have shown impressive growth, and its 2023-2024 financials are particularly strong. Wise also boasts no debt and solid free cash flow. However, a significant portion of its reported cash—around $14 billion—is likely customer funds, not the company’s operational balance sheet. This distinction is crucial when analyzing payment companies, banks, or insurers.

Earning Overview

In the fiscal year ending March 31, 2024 (FY24), the company reported a 45.91% increase in revenue to £1.41 billion, up from £967.90 million in the previous year. Earnings also saw a substantial rise of 211.05% to £354.60 million.

In its FY24 report, Wise highlighted several key financial metrics:

• Active Customers: 12.8 million

• Cross-Border Volume: £118.5 billion

• Customer Holdings (Cash & Assets): £16.2 billion

• Underlying Income: £1.2 billion

The company achieved an underlying gross profit of £505.0 million, representing a 30% year-over-year growth, with an underlying gross profit margin of 76%.

Fundamental Analysis

Wise’s margins are attractive: gross margin at 70%, operating margin at 30%, and net margin at 25%. Its efficiency metrics, such as an ROE of 100%, are impressive. Its valuation, with a forward P/E ratio of 28, suggests some expected decline in profitability for 2025.

Looking at Wise’s free cash flow, it shows solid growth and efficiency. The company has no debt, which is a positive sign. However, I’d advise caution when examining its balance sheet. The reported cash of $14 billion likely includes customer funds rather than operational reserves. This is a common consideration for payment processors, banks, and insurers. Always check the annual report to clarify such figures. Additionally, there’s some share issuance, which seems reasonable in this case.

When it comes to margins, Wise impresses with a gross margin of 70%, an operating margin of 30%, and a net margin of 25%. These figures indicate high profitability and efficiency. Return on equity (ROE) at 100% is another standout metric. With a P/E ratio of around 20 and a forward P/E of 28, there’s an expectation of slightly reduced profitability in 2025.

Guidance

Wise has provided guidance for the fiscal year ending March 31, 2025 (FY25), forecasting underlying income growth between 15% and 20%. This projection indicates a deceleration compared to the 31% growth observed in FY24. The company attributes this expected slowdown to factors such as increased customer growth, higher interest rates, and strategic fee reductions aimed at enhancing market share.

In the first half of fiscal 2025, Wise reported a 19% year-over-year increase in underlying income, with the second quarter contributing a 17% rise to £337.0 million.

The company also aims for a medium-term underlying profit margin between 13% and 16%, expecting to approach this range in the second half of fiscal 2025. These projections are supported by growth in active customers, which rose by 23% year-over-year to 8.9 million in the second quarter, and a 20% increase in cross-border volume to £35.2 billion. However, Wise has implemented price reductions in cross-border transactions, leading to a decrease in the cross-border take rate from 67 basis points to 59 basis points year-over-year.

Free Cash Flow

As of September 2024, Wise plc reported a trailing twelve months (TTM) free cash flow of approximately $4.54 billion. This represents a significant increase from the $449.6 million reported in 2023. The company's free cash flow conversion rate for the fiscal year 2024 was 101% of reported profit before tax, indicating strong cash generation relative to profitability. Additionally, Wise maintains a robust balance sheet with no debt, enhancing its financial flexibility. However, it's important to note that a substantial portion of the company's cash holdings, reported at £14 billion, likely represents customer deposits rather than funds available for corporate use. Investors should exercise caution and review the annual report to distinguish between customer funds and the company's operational cash.

Risk & Challenges

To put this in perspective, let’s compare Wise to PayPal, a well-known player in the same space. PayPal’s margins—gross, operating, and net—are all lower than Wise’s, with a net margin of just 14%. PayPal’s revenue and net income are also growing, but like Wise, its $14 billion in cash likely includes customer funds. PayPal is executing share buybacks but has substantial share issuance through stock-based compensation (SBC), which I see as a negative.

The biggest issue for both companies—and the payment processing industry as a whole—is the lack of a strong competitive moat. These businesses primarily compete on two factors: brand recognition and pricing. While PayPal benefits from a strong and reputable brand, its high fees (up to 5% on international transfers) are a significant drawback. In contrast, Wise offers much lower fees, but this strategy inherently limits profitability.

My primary concern with both Wise and PayPal is the lack of a sustainable competitive advantage, or "moat." In the payment industry, competition revolves around brand reputation and fees. PayPal has a well-established brand, but its high fees—up to 5% on international transfers—make it less attractive. Wise, on the other hand, competes on low fees, but this strategy is not without risks.

The payment industry is highly competitive, with companies constantly lowering prices to capture market share. This “price war” can erode margins and profitability over time. For Wise, maintaining its low-fee model is essential to its appeal, but it’s not a guaranteed long-term strategy. In 2023, for instance, Wise announced fee increases in the UK, highlighting the challenge of sustaining minimal fees indefinitely.

Valuation

As of January 6, 2025, Wise plc (LON: WISE) has a market capitalization of approximately £11.18 billion and an enterprise value of around £10.17 billion.

The company's price-to-earnings (P/E) ratio stands at 22.70, indicating that investors are paying £22.70 for every pound of earnings. Analysts have estimated Wise's intrinsic value using various models. For instance, a discounted cash flow (DCF) analysis suggests an intrinsic value of approximately £1,204.87 per share, implying a potential upside from the current market price.

However, it's important to note that Wise has recently forecasted a slowdown in income growth for fiscal 2025, expecting underlying income growth between 15% and 20%, down from 31% in fiscal 2024. This projection has led to a decline in share price, reflecting investor concerns about the company's future growth prospects.

Conclusion

In my opinion, the payment industry is challenging for long-term investment because of this reliance on price competition. All players—Wise, PayPal, and others—face a dilemma: they must balance attracting customers with low fees while ensuring sustainable profitability. Over time, this dynamic could erode the value proposition of even the strongest players.

In conclusion, while Wise and similar companies may show strong growth metrics, the intense competition on price and the lack of a durable moat make this industry unappealing for long-term investment. If you’re interested in Wise, ensure you conduct thorough due diligence before making any decisions. For me, it’s a no for long-term.

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