Summary
- In this article, we'll be taking a look at Wise plc, an IT company in payments and payment processing. This company is a rare sort of gem.
- It's one of the very few IT-oriented businesses that I would currently be interested in investing in at the right price.
- Let me show you why - and what targets I give for Wise for 2023.
Dear readers/followers,
I've covered Wise ( WPLCF ) (WIZEY) in co-produced pieces before - this is going to be the first piece where I update on the company since my first, small investment into the business. I own a small stake in Wise, and I mean to potentially expand this over time. The fact is, I'm not opposed to growth investments or growth stocks - I just want them to have the sort of fundamentals I look for in other companies. This is hard to find in tech because most of the companies there are SBC-heavy, non-profitable operations with limited forecast accuracy not allowing for real, conservative theses.
Wise is somewhat different.
Let's update the company for 2023 and what to expect.
What is Wise?
So, in my previous article, I presented Wise, the fintech company offering payment solutions that are natively listed on the LSE. Its history goes back around 12 years, with a very motivated chairman and CEO that was part of the founding team - businessmen seeking simplification in payments.
Some very basic numbers for the fiscal of 2022, compared to my previous article when the company had revenues of above £300M. This company now has revenues of £560M for 2022, £121M in EBITDA, netting around £38M, and a market capitalization of around £6B. A very good set of numbers and growth compared to what we've seen before.
I actually view Wise as being a very qualitative business, despite its no-dividend and lack of an institutional credit rating, and I'm happy to be one of the first European contributors here in SA to offer comprehensive coverage for the company.
The "magic" of Wise is explained through the so-called hawala-money transfer system in how it works. In my last co-produced article , there is a graphical representation of what happens when money is transferred in Wise, which is better than trying to explain it in text, so I suggest you look that article up.
It's all about transaction gateways . When Wise does its thing, money actually never crosses borders, and there's a significant difference to so-called correspondent banking, as illustrated below.
My own savings for using Wise compared to common ways of transferring money like PayPal ( PYPL ) is above 90%. You may understand why I want to invest in Wise, but I don't want to invest in PayPal, even at this valuation. To give you a concrete example from a personal/anecdotal perspective, I can receive a payment to my US-based Wise account, complete with an ACH-compliant account number, and transfer it to a Swedish bank account with a turnover of fewer than 36 hours from the time of transfer initiation to my Wise account.
This is the Wise advantage - together with the fact that it's, quite simply, very convenient. Still, Wise doesn't hold a banking license/charter, and has no plans to do so. It does not lend out money, it does not provide overdraft or similar services. It also has no dividend yield, as mentioned.
The trickiness of seeing how Wise is doing is related to the simple fact that it does not provide service-specific revenue numbers, making it almost impossible without significant guesswork to estimate (or guesstimate) how things are actually working.
What we do know is that the personal transfer segment is about 4X as large a source of revenue as business transfers for the 2022 fiscal, with a majority exposure to EUR/GPB, but with USD and other currencies taking a larger and larger overall role.
Wise has very low leverage (net cash position), and, therefore, the EBITDA to FCF conversion rate is outstanding (86% expected 2022 year-end). As of today, the company's net cash position, or negative net debt, is at around £266M, and this is expected to balloon to nearly £2B over the course of the next 4-5 years.
Unlike many other companies in the tech sector I look at, Wise is profitable. It has GAAP profit today , and it's expected to grow going forward - significantly.
Dividends are likely to remain at zero - that's actually fine. If the only flaw is a lack of dividends, but every other single metric is solid, that's something I can actually live with. We have the 3Q23 trading update, even though the company hasn't yet provided the full-year results as such (for the 2022 calendar, we have a split fiscal). Volumes for the company's services in 3Q22 are up 28% to the 3Q22, and for the third consecutive quarter, more than 50% of the company's payments were completed at instantaneous speeds. The company's focus remains on lowering fees, a difficult notion in today's environment, reflected in the 2 bps fee increase the company faced here.
The main argument for Wise is the profitability you see above - even with its limited age, and it being a tech/growth company, Wise is proof that a company does not need to be unprofitable, or needlessly SBC-focused. Interest income is up significantly, and FY23 targets have been bumped, to an income growth guidance of 68-72%, this is up from 55-60%.
The company has managed to launch new products and ventures in the UK, including its Asset product, a cashback program in the UK for business customers for the Wise Debt card, a pilot program for cashback on balances for EEA, and removed all fees on domestic transfers for the FX of EUR, GBP, SGD and HUF.
New physical card products are being rolled out as well in the US, where previously you could only have a digital card, and the company is improving the pay-ins for businesses.
Both top-line and bottom-line results are very solid - and the company's performance as an investment is well-highlighted looking at the last co-produced Wise article.
So, I'm not against growth investing - I just want "good" companies when I do it, and Wise is a good company. Let's see where the valuation for this good company is, and what we should look at given the improvements in operations.
Wise plc Valuation for 2023
Wise, despite its good results, IPOed during Tech froth, and has underperformed since its IPO. I wouldn't have bought Wise at the IPO price, nor did I. The company is still more than 20% down since that time, and I don't see it being able to climb those heights again soon.
My previous target for the company was around £7.40. The company is currently at £5.65, implying that there is still upside left. However, this is the first time I've written or touched on Wise for some time - so some impairments are in order. The increased geopolitical and interest rate uncertainty as well as macro is of a somewhat negative impact on Wise, as I see it. The ADRs for Wise are WPLCF and WIZEY.
My forecast remains a lower EBITDA margin - and this is confirmed by the consumer cost increases the company is seeing here. Over the longer timeframe, I still expect margin stabilization as software integrations increase and as Wise gets a volume processing advantage. While cost increases are currently negatively impacting this, I believe it will normalize over time. Overall, we expect a margin somewhere in the 28%-29% range for the terminal period, but a decrease to 24% or below for this coming fiscal, and this has turned out mostly to be the case for 2023E.
On the basis of this, and a WACC of 9.5% with sales growth assumptions of 15% and EBITDA of 14-18%, we get an implied EV/share of between 650-730p/share, which is down from my latest calculations. The company is also now trading higher than it was - during my last co-produced article, it was at 499p.
I still say the company is hard to consider it terms of its peers. Most of the company's direct remittance peers are not actually publicly listed and comparing them to companies like PayPal only makes sense in part. The only similarity to some of these is that the company's multiples, Wise's, are high - as are these peers.
Despite a hardening macro and complex customer environment, Wise continues to show discounts here. S&P Global analysts follow the company with 12 analysts currently estimating a range from £3.8 to £10.00. 6 out of these 12 analysts are at a buy, with an average of £6.8. This is one of those very rare cases where I go above such analysts, and say that a £7/share PT is a fair target for Wise plc.
So, I do have an updated thesis for Wise - and it's a positive one.
Wise isn't my largest position. Far from it. I wouldn't heavily invest in companies such as this, owing to the fact that they lack a dividend, but I'm open to allocating a few percentages of my investments to them, given the explosive potential in growth, and returns, that could materialize. For the time being, I've done very well with Wise as an investment - beating the market by a significant amount.
So here we go for 2023.
Thesis
- Wise is a class-leading player in an attractive sector that's likely to be important going forward into the future, with increased employment mobility, and people living in far different ways than we've seen for the past 100 years. Simple, cross-country transfers are likely to be crucial, and Wise plc is an enabler of such transfers.
- The company is profitable and growing. It doesn't have the same flaws as many growth-type stocks, and this makes it one of the very few interesting "tech" or "growth" stocks out there to me.
- Based on growth estimates, targets, and NAV, I'm lowering my target to £7/share, which still implies a significant upside in the double digits here.
- I consider Wise plc to be a "Buy" here.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
Now, the company has a different risk profile than other investments. I would call it "speculative" - but I do consider it a "Buy" here, and I am invested in the stock.
For further details see:
Wise plc: I Believe It Is 'Wise' To 'Buy'