2023-12-30 00:40:12 ET
Summary
- Wise exhibits a robust financial performance, with a remarkable 132.1% revenue growth from 2018 to 2024, showcasing its financial resilience and stability.
- Despite facing challenges like recent interest payouts on deposits and potential competition risks, Wise strategically positions itself to navigate hurdles, reflecting adaptability and forward-thinking management.
- The creation of multiple financial models supports the investment appeal, projecting a fair price averaging $11.87 and a future target of $21.94, translating into an impressive annual return of 21.35%.
- Based on the comprehensive analysis and the company's persistent growth potential, a confident "buy" rating is asserted, emphasizing the calculated fair price that considers unpredictability and potential risks.
- Wise's commitment to rapid expansion, capitalizing on its network effect, and maintaining an impressive operating income margin contributes to a promising future outlook for investors seeking substantial returns in the dynamic landscape of financial technology.
Thesis
In this article, I will reassess Wise plc. ( OTCPK:WPLCF ) ( OTCPK:WIZEY ) following the release of its FQ2 2024 earnings. My previous analysis was conducted after the release of FQ4 2023. In this article, by employing three distinct residual earnings models, I determined that the fair price stands at $11.87, with a projected future price of $21.94. This assessment categorizes Wise as a robust compounder for the medium term, projecting annual returns around 21.35% throughout FY2029. Consequently, I recommend Wise as a "buy."
Overview
In my previous article about Wise, I said that the stock was trading at fair value, and that a better entry point was possible in the near-term. In that article I place a fair price target of $8.39, when the stock was trading at 8.29. Also I projected the present price into the future and I got a price target of $13.74 for 2030.
After that, Q4 2023 was released and the stock quickly rises, nevertheless it went down and stayed like that until Q1 2024 was released. Since Q1 2024, the stock has risen 33.17%.
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Fintech Market User Growth Projections
The fintech market is anticipated to reach 5.48 billion users by 2027, which signifies an annual increase of 5.85% from 4.44 billion in 2023.
In the previous five-year period (2019-2023), the market observed a growth rate of 9.79% in new user adoption. This marks a slowdown in the adoption of fintech for digital payments, the market in which Wise operates.
Statista
Fintech Market Transaction Volume Growth Projections
The fintech digital payments market is poised to achieve a transaction volume of approximately $14.17 trillion by 2027, a significant increase from the $8.89 trillion recorded in 2023. This projection implies an annual CAGR of 14.84%, significantly surpassing the projected user growth rate of 5.85%. This suggests that new users will need to conduct larger transactions for digital payment companies, like Wise, to sustain substantial growth.
Statista
Revenue by User
As depicted in the table below, the transaction per user in the digital payments market is expected to grow at a CAGR of 7.25% from 2023 to 2027, with each user projected to transact approximately $2,580.
This data presents a contradiction, as it raises questions about how the transaction value can grow at a rate of 14.84%, while the average transaction per user increases at a rate of 7.25%, only slightly higher than the projected user growth of 5.85%.
For the period from 2019 to 2023, the average transaction value per user increased at a rate of 11.76%, which closely matched the user growth rate of 9.79% annually, leaving a gap of just 1.97%.
Statista
Financials
Wise's revenue has demonstrated robust growth, advancing at a remarkable pace of 132.1% during the period from 2018 to 2024. Since FY2023, the time of my previous article, revenue has experienced a substantial 23% increase. Simultaneously, operating income has surged at an impressive rate of 463.3%, with a 23.97% growth from 2023 to 2024. Net income has followed suit, growing at an equally impressive rate of 491.2%, and experiencing an 88.54% increase from FY2023 to FY2024.
Author's Calculations
The operating margin has now reached 34.02%, a substantial improvement from the FY2023 figure of 20.7%. Similarly, the net income margin has risen to 22.95%, marking a noteworthy 9.48% increase from the previous FY2023 level.
Author's Calculations
The balance sheet remains robust, evident in the growth of cash reserves by $183 million. Long-term net has also increased, albeit by a more modest figure of $53 million.
Author's Calculations
The most notable growth aspect for Wise lies in its free cash flow. In FY2023, Wise generated $158 million in free cash flow, but in FY2024, on a trailing twelve-month [TTM] basis, it soared to $318 million. This impressive performance results in an FCF margin of 21.6%, a significant climb from the 2023 mark of 13.2%.
Author's Calculations
Author's Calculations
Valuation
In this valuation analysis, I will perform one residual earnings model. For book value and operating assets I will be using proportions tied to revenue. The net operating assets at the start of FY2024 where $560.20M and that produced $1.19B in FY2023, which if you do that division, it will give you that those operating assets represented around 47% of the revenue Wise registered that year. For book value I will take the current figure of $903.6M, and then divide it by the FY2024 TTM revenue of $1.46B, this will give 61.8%.
TABLE OF ASSUMPTIONS | |
(Current data) | |
Equity Value | 903.50 |
Debt Value | 379.10 |
Cost of Debt | 5.28% |
Tax Rate | 33.23% |
10y Treasury | 3.90% |
Beta | 1.19 |
Market Return | 10.50% |
Cost of Equity | 11.75% |
Net Income | 265.10 |
Interest | 20.00 |
Tax | 88.10 |
D&A | 10.40 |
Ebitda | 383.60 |
D&A Margin | 0.71% |
Interest Expense Margin | 1.36% |
Revenue | 1,469.1 |
CAPM | |
Risk Free Rate | 3.90% |
Beta | 1.19 |
Market Risk Premium | 6.550% |
Required Rate of Return | 11.695% |
Commencing with revenue, FY2024 projections indicate an expected figure of $1.58 billion, with analysts anticipating a subsequent increase to $1.84 billion for FY2025. Furthermore, in the "growth" tab for the stock ticker of Wise, you can see that the forward revenue growth is 39.27%.
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Moving on to income, the company foresees a 20% growth in the medium term. However, it's worth noting that the initial projection of "28-33% for FY2024" has been revised upward to a more optimistic 33-38%.
The expected income growth of 33-38% in FY2024, coupled with the aim for a more than 20% compound annual growth rate [CAGR] over the medium term, leads to the results outlined below. Nevertheless, despite these impressive figures, they suggest a potential decline in Wise's margins over time.
This leaves us with the results you can observe below. Nevertheless, even if they are extraordinary, they are implying that Wise's margins will decrease over time.
Revenue | OperatingIncome | Plus D&A | Plus Interest | |
FY 2024 | $1,580.0 | $517.0 | $528.19 | $549.69 |
FY 2025 | $1,840.0 | $620.4 | $633.43 | $658.48 |
FY 2026 | $2,562.6 | $744.5 | $762.62 | $797.51 |
FY 2027 | $3,568.9 | $893.4 | $918.64 | $967.23 |
FY 2028 | $4,970.4 | $1,072.1 | $1,107.24 | $1,174.90 |
FY 2029 | $6,922.3 | $1,286.5 | $1,335.47 | $1,429.70 |
^Final EBITA^ |
Net income Margin | |
FY 2024 | 32.7% |
FY 2025 | 33.7% |
FY 2026 | 29.1% |
FY 2027 | 25.0% |
FY 2028 | 21.6% |
FY 2029 | 18.6% |
Author's Calculations
The first step involves assuming the scenario where Wise maintains its operating income margin at 32.7% throughout FY2029. Considering the robust revenue growth of 39.27% beyond FY2025, effectively aligning operating income with this margin-to-revenue relationship suggests an anticipated growth pace of 32.7%. Wise's historical growth, as evident in the "financials" section of this article, supports the feasibility of such a scenario. The estimates highlight that Wise is currently overvalued, with a recommended fair price set at $9.55, reflecting a 12.5% downside from the current stock price of $10.9. Looking ahead to FY2029, this model indicates a projected stock price of $17.49, translating into annual returns of 10.9% over the next 5 years and 6 months until the conclusion of FY2024 for Wise.
Other Models
The first thing I will do is assume what would happen if Wise is able to maintain that operating income margin of 32.7% throughout FY2029. Let's remember that revenue in these models is growing at 39.27% beyond FY2025, which means that tying the operating income with a margin to revenue, I am effectively making the operating income to grow at a pace of 32.7%. Is that possible? Well Wise has been growing at a much higher pace as you can see on the "financials" section in this article.
Revenue | OperatingIncome | Plus D&A | Plus Interest | |
FY 2024 | $1,580.0 | $509.9 | $521.05 | $542.56 |
FY 2025 | $1,840.0 | $593.8 | $606.79 | $631.84 |
FY 2026 | $2,562.6 | $826.9 | $845.08 | $879.97 |
FY 2027 | $3,568.9 | $1,151.7 | $1,176.95 | $1,225.53 |
FY 2028 | $4,970.4 | $1,603.9 | $1,639.13 | $1,706.80 |
FY 2029 | $6,922.3 | $2,233.8 | $2,282.82 | $2,377.06 |
^Final EBITA^ |
Author's Calculations
The outcome of this model reveals a substantial increase in Wise's fair price, soaring to $15.05, indicating a significant 37.8% upside from the current stock price. Projections for FY2029 suggest a stock price of $28.03, translating into impressive annual returns of 28.5%.
Subsequently, I'll explore another model, maintaining the operating income margin at 32.7%, but with both revenue and operating income (tied with a margin to revenues) growing at a more conservative pace of 27% beyond FY2025.
Revenue | OperatingIncome | Plus D&A | Plus Interest | |
FY 2024 | $1,580.0 | $509.9 | $521.05 | $542.56 |
FY 2025 | $1,840.0 | $593.8 | $606.79 | $631.84 |
FY 2026 | $2,336.8 | $754.1 | $770.63 | $802.44 |
FY 2027 | $2,967.7 | $957.7 | $978.70 | $1,019.10 |
FY 2028 | $3,769.0 | $1,216.3 | $1,242.95 | $1,294.26 |
FY 2029 | $4,786.7 | $1,544.7 | $1,578.54 | $1,643.71 |
^Final EBITA^ |
Author's Calculations
Determining a precise valuation for Wise proves challenging, as illustrated in my previous article where Wise appeared fairly valued. However, following a significant Q2 2024 revenue beat, the stock surged by over 30%. This unpredictability factor makes it challenging to definitively label Wise as a buy or not. Nonetheless, considering Wise's substantial growth potential, as demonstrated by the additional models I've constructed, I am inclined to recommend Wise as a "buy."
To account for the unpredictability, I will establish the fair price as an average derived from all these models. In my assessment, this approach considers and incorporates the inherent unpredictability of Wise's stock. Consequently, the calculated fair price for the stock stands at $11.87, with a future price projection of $21.94. This implies annual returns of 21.35% throughout FY2029.
This model presents the minimum growth required for Wise to achieve fair valuation, with the current fair price estimated at $11.02, a marginal 0.9% higher than the current stock price. Looking ahead to FY2029, the projected stock price is $20.31, indicating annual returns of 15.6%.
So what?
It's very difficult to put a price tag on Wise, since as you can see, in my previous article, Wise came out to be fairly valued, however after a huge beat in Q2 2024 revenues, the stock rallied over 30%. This is the factor of unpredictability which makes it hard to tell if Wise is a buy or not, however observing the high growth of Wise and that it can still grow as outlined by the two additional models I made, I will rate Wise as a buy.
Fair price will be an average from all these models, which In my opinion will factor this factor of unpredictability. With this calculation, the stock's fair price comes out as $11.87. The future price will be set at $21.94, this means that annual returns throughout FY2029 is 21.35%.
Risks to Thesis
The primary risk to this bullish thesis lies in the potential failure of Wise to achieve the projected high growth rates or a significant deterioration in its profit margins. For instance, the third model reveals that Wise must maintain a robust revenue growth rate of 27% to justify the investment in terms of annual returns.
Another concern emerges from Wise's recent introduction of interest payments on certain deposits. While this move may attract deposits, Wise must generate returns surpassing the interest rates paid to depositors. This could pose a challenge, potentially placing Wise in a precarious situation where they might lack sufficient funds to fulfill deposit obligations.
The final risk pertains to competition, as expounded in my article on PayPal Holdings, Inc. ( PYPL ). Fintech companies, including Wise and PayPal, lack a distinct factor that sets them apart. Both platforms serve as conduits for receiving payments, often with users swiftly transferring funds to traditional bank accounts. Consequently, customer loyalty in this sector is not as steadfast as in industries like cellphones. The risk here is that if Wise loses customers, it could trigger a decline in the stock price. This underscores the importance of Wise's de facto strategy—to expand rapidly and create a network effect—to mitigate this risk.
Conclusion
In conclusion, Wise presents a dynamic investment opportunity marked by its robust financial performance and impressive growth trajectory. The company has consistently demonstrated substantial revenue increases, with a notable growth rate of 132.1% from 2018 to 2024. Operating income and net income have also witnessed remarkable escalations, underscoring Wise's financial strength. Despite encountering unforeseen challenges, such as the recent interest payouts on deposits and potential competition risks, Wise has strategically positioned itself to navigate these hurdles. Furthermore, the creation of multiple financial models reaffirms the investment appeal, projecting a fair price averaging $11.87, and a future target of $21.94, translating into a compelling annual return of 21.35% throughout FY2029.
In light of the comprehensive analysis and the company's persistent growth potential, I assert a confident "buy" rating for Wise. The calculated fair price considers various factors, including unpredictability and potential risks, providing investors with a balanced perspective. As Wise endeavors to expand rapidly, capitalize on its network effect, and maintain its impressive operating income margin, the present and future targets signal a promising outlook for investors seeking substantial returns in the evolving landscape of financial technology.
For further details see:
Wise: The Best Alternative To PayPal (Upgrading To Buy)