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  • Brett Schafer

Not So Deep Dive: Wise Stock

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Show Notes

(Ryan) What they do: Wise’s stated mission is “We are creating money without borders: instant, convenient, transparent and eventually free.” Basically Wise is a multi-currency account where users can hold, receive, send, or spend money.

Historically, the banking industry would send money through a complex system of correspondent banks. And it would actually send the money. So there were fees that were constantly added and it also took time to execute trades. Additionally, some banks evolved to say that they have no fees but they would then mark up their own currency exchange rates and they weren’t very transparent about it.

The way it works for Wise is that Wise has bank accounts set up all over the world in different countries. So if you want to transfer money to another country and in another currency let’s say USD to pounds, you log on, pay in your USD to Wise’s US account, then Wise’s UK account sends pounds to the recipient. The money is never actually sent anywhere. And they show users the exchange rate and transaction fees beforehand, so total transparency. It’s 8x cheaper than traditional banks, 6x cheaper than Paypal, and the only cheaper solution is actually Moneygram.

(Ryan) History: In 2011, Taavet Hinrikus and Kristo Kaarman started Wise. Initially, the idea was meant just to simply solve a pain point both of them were facing. So both Kristo and Taavet were from Estonia but they worked in London. Taavet for Skype and Kristo for Deloitte. But despite both working in London, Taavet got paid in euros while Kristo was paid in pounds.

However, Kristo had a mortgage in Estonia that he had to pay and in order to pay it he would have to convert it to euros. That process took lots of fees and banks made a hefty chunk on it. So they decided to find a workaround. Every month Taavet would put his euros (it was Estonian kroon at the time but they’ve switched) into Kristo's Estonian bank account. And in exchange Kristo would replace the amount in Taavet’s UK account with the appropriate amount of pounds.

They wanted to help their friends with this process as well, so they built a website and after crowdsourcing names from their friend group, they came up with TransferWise. Since then, it has evolved into a more complete international account with additional features. And they went public via a direct listing in July. (green flag)

(Brett) Industry/Landscape/Competition:

  • The same industry as Remitly so I’ll go over some of those numbers again

  • $24 trillion in cross border payment volume each year

  • Given Wise’s low-cost option, there’s likely around a $100 billion opportunity in cross-border payment revenue

  • However, in his letter to shareholders, the founder said that eventually, they want to make cross-border payments free so eventually, the business model will change

  • Competitors: Remitly, Xoom, Moneygram, Western Union, Revolut

  • Compared to Remitly, Wise seems to lean more wealthy and European

(Ian) Management and Ownership:

  • Kristo Kaarmann is the co-founder and CEO

  • He owns nearly 19% of the company

  • He worked in consulting prior to founding Wise

  • Taavet Hinrikus is the other co-founder and executive chairman

  • Prior to Wise, he was Skype’s director of strategy & first-ever employee

  • He owns 9% of the company

  • Wise has significant VC/PE ownership, about 26%

  • Andreessen Horowitz owns about 9%

  • Since this was a direct listing, there is no lockup period

(Brett) Valuation:

  • Market cap of $9.85 billion, ticker WISE (everything is in pounds so make sure to do conversions yourself)

  • P/S of 14.4 based on annualizing 1H 2022 numbers (can’t do TTM)

  • P/S of 17.5 based on FY 2021 revenue (ending in March)

  • P/GP of 28 based on FY 2021 numbers

  • Looks like they just allocated 30 million shares for employee stock options. Share count is close to 1 billion for reference

(Ryan) Earnings: Just reported their results for H1 on November 30th, so quite recent.

  • And in Q2, they reported 3.9 million total customers that completed at least one transaction. That’s up 23% YoY

  • 95% of those customers are individuals vs. 5% as businesses

  • Transaction volume per customer grew by 10% in Q2

  • $290M in revenue for H1, up 33% YoY

  • The gross margin was 68%, up from 62%

  • And they had $69M in Adj. EBITDA, which converts well to FCF

  • So FCF margins of 23%

  • Also, something that they highlighted was that they were able to reduce their average transaction prices for customers by 7 bps from .69% to .62%. (On the CC, they stated that by lowering this they are able to attract more customers)

(Ian) Balance sheet and liquidity:

  • Over $4B in cash

  • About $100m in debt

  • Significant net cash position

  • Not the same balance sheet items at Remitly (probably due to different regulations under IFRS)


Anecdotal Evidence:

  • (Ryan) Believe we use them with one of our sponsors. Other than that, I haven’t really had any reason to transfer money across borders.

  • (Brett) The app seems good. I think I’m going to try out the debit card so I wonder what the fees on that are

  • (Ian)

Future growth opportunities:

  • (Ryan) API service. Guess Remitly isn’t the only one that has this. Wise said that more than a dozen banks and enterprises use this service already. I like to think of this almost as a hedge. It eliminates the challenge of replacing banks but instead enables banks. Curious how it differs from Remitly’s offering.

  • (Brett) Earning more than just transfer fees in the Wise Account. This is the bank-like account you can hold through the app. You can hold money in 56 different currencies. As of the IPO prospectus, there were 1.6 million debit cards issued and $5.15 billion held in accounts.

  • (Ian) Wise business, “The only business account you need to go global.” Lower fees, don’t need to open bank accounts in multiple countries. Also provides some ancillary services. Allows companies to invoice and receive payments at low fees and quickly. 50% of payments arrive in less than 1 hour. Seems particularly suited toward software and startups.

Highlights and lowlights:

  • (Ryan) Highlights: They state that they account for approximately 2.5% of global transfer volume. But I think the market will expand as fees are lowered. So they’ll sort of carve-out industry growth on their own. Also, 97% cash flow conversion is great. Lowlights: Double-edged sword is that this is a network effect business. If I’m a business and I want to pay a supplier through Wise, they need a Wise account. Good thing is, it’s very intuitive to set up, but that’s part of what has made Paypal so sticky despite higher transaction fees.

  • (Brett) Highlights: Management’s candor/goals outlined for the company, regulatory barrier + switching costs seem high here (not sure network effect is as strong), minimal competition, good unit economics, and the number-one name in the space. Lowlights: The crypto/central bank tail risk, good amount of shareholder dilution, and risks on currency fluctuations, political stuff, that is impossible to predict as a shareholder.

  • (Ian) Highlights: Clearly good for consumers. FCF margins. Strong balance sheet. Lowlights: Large VC ownership. New to public markets

Bull case:

  • (Ryan) I think there’s tons of low-hanging fruit, especially within business accounts. If they can capture those, and the network effect starts helping them, this is a business that could grow the top line at double-digit rates for a long-time and with very little expenses required to do so. I’d like to see them get to 1 million businesses. (~4x from here)

  • (Brett) Given that gross margin got up to 68% in the last report and that this should have mostly fixed operating expenses, the path to 25% - 30% FCF margins seems doable. At $2 billion in sales (that is probably around 4x the size of here), that is about $600 million in free cash flow/earnings. So you probably need to expect revenue to 10x or so over the next decade.

  • (Ian) A bet on the continued growth of international markets and a growing world economy that becomes more and more interconnected. It becomes essential for every business in the world to do cross-border transactions.

Bear case:

  • (Ryan) There’s this sort of race to zero transaction fees across the industry, and they have to find alternative ways to generate revenue. I think they can do it, like earning interest on account balances or debit card transactions, but if that race to zero comes fast and the industry stays fragmented, I don’t think Wise gets enough from those additional services to warrant the price tag.

  • (Brett) The only thing I can think of is valuation. I believe the lowlights I presented have a low chance of occurring.

  • (Ian) Competition, two sides of the same coin. Radical innovation changes the nature of money flow and cross-border transfers. Or if no innovation, competition from legacy.

Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get $10 off your first month of the service.

Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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