Weighing conventional wisdom and fintech growth
- Investors are more cautious about fintech after some disappointing moves
- The growth prospects are attractive despite labor costs and other disadvantages
Originally known as TransferWise, WISE (WISE) is a financial technology company or fintech, one of the fast-growing new generation of businesses that wants to offer a relatively narrow band of financial services using, primarily, mobile phone apps and cloud-based operations that the existing large or challenger banks either avoid, do not do good or offer too high a cost. WISE is focused on the movement of money between countries and payments made outside the account holder’s home currency.
Fintechs with strong business models and fast, transparent growth were highly valued by investors in 2020-21, but this year the technology sector has been routed and companies that floated with huge fanfare have disappointed horribly. WISE’s shares lost 75 percent of their value from the IPO and now look reasonable. However, there are still a number of negative factors to set against a strong growth dynamic.
WISE was founded in 2011 by two Estonian entrepreneurs (who still own just over a quarter of the equity) and earned “unicorn” status (privately held start-ups that achieve a valuation of over $1 billion) well before London floated in. July 2021. It had a wide spread of private equity backers, including Lone Pine Capital, D1 Capital Partners, Vulcan Capital, Baillie Gifford, Fidelity and LocalGlobe: many of which remain on the stock register.
On its market debut, WISE was valued at $11bn (£8.75bn at the time) and achieved an impressive opening with the valuation running up to around $15.5bn by September 2021. However, then the fire started in tech stocks where concerns over rising benchmark rates cut deeply into valuations, many/most of which were set using long-term values with discounted cash flows. While earnings expectations typically did not fall, the price that investors were willing to pay for those earnings fell sharply. WISE’s share price then began an 8-month slide, losing three quarters of its value with the share price peaking at 1,563p and plummeting to 371p.
Unlike many technologies and, especially FinTech, shares WISE has a significant number of customers (not only fast growing – the science of small numbers can be far too flattering in this area), high revenues (£530 million last year) and is profitable in that overall levels: profit before interest, tax, depreciation and amortization (EBITDA), profit before interest and tax (EBIT) and profit before tax (PBT).
Last year, it reported 66 percent gross margins and 22 percent profit at the EBITDA level. Needless to say, there is a marked difference between the “adjusted” figures and the statutory ones – adjusted EBITDA last year was £121mn, but only after excluding £42mn of share-based payments and £7.6mn of exceptional items. However, the business is still profitable and very cash-generating – making it something of a rarity in the company of the likes of Klarna, Revolut, Marshmallow Insurance, Robin Hood and Monzo.
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