Description

Investment Thesis: No games, pure organic growth

Wise is an industry leader in cross-border payments that’s gaining market share in a market with huge TAM ($11 trillion moved cross-border $2T consumers, $9T SMBs). Centered around its global treasury centers in both developed and emerging markets, the company has built a scalable infrastructure base that’s hard to replicate.  

Recently the stock has declined due to cyclical factors such as lower payment volume per customer, management’s conservative guidance and price cuts intended to accelerate growth. However, we think that the company’s expanding product offering in addition to core FX payments would support the overall take rate, and the results are likely to beat management guidance. 

Quick Company Overview:

Wise is a best-in-class cross-border payments company that was created to increase the payment speed and lower FX related cost for cross-border transactions. Traditionally when A wants to transfer money to B in a different currency, they’d go through their banks, which goes through SWIFT and the correspondent banking system, which charges a hefty fee in the currency conversion process and is very slow. Wise solved this problem by building regional treasury centers and turned global payments local. Using local payment rails and offsetting opposite flows, the firm is able to reduce embedded FX cost from 2% to 0.6% and transaction time to <15 minutes. Building off this core FX payment product, the company also then started offering multi-currency accounts, where users can hold different currencies in one wallets, debit cards that’s FX efficient, and platform products for other fintechs. 

Highlights

Wise has consistently outgrown competitors and gained market share

Wise focuses on two segments: Personal (remittances focused) and businesses. While there is broader industry beta ~7% CAGR, Wise has shown 34% CAGR over the past 5 years in gross payments volume, taking market share. Its customer base grew with 31% CAGR. All growth has been organic, the company has done no M&A to achieve this growth, showing the strength of its product.  

(Wise volume in British pounds, 1 GBP = 1.26 USD)

Overall take rate has increased over the years due to cross-selling / ancillary revenue from non-FX payments, despite price cuts to accelerate growth

Wise management intentionally maintains or even lower FX take rate to push its market adoption, but the growth of non-FX payments more than offset the impact, pushing overall take rate on payments revenues to all-time high in FY 2024 (March 31 Ending). Such ancillary revenue include debit card interchange fees, ATM withdrawal fees, investment fees etc, and has grown from 3bps of TPV in 2020 to accounting for 22bps in 2024, showing fast adoption of additional product from Wise customers. 

Another evidence is the fast growth of card-only users that has grown from 0.2 million since its launch in 2021 to 2.1 million (2024), accounting for ~5% of total current volume.

From unit economic perspective, non FX payment revenue has increased from $2.6/user (2020) to $20/user (2024), while the CAC (S&M/New Users) stood at 

Management medium term guidance too conservative given Wise’s operating leverage and strong unit economics

In the most recent earnings call Wise management refocused metrics around “underlying core revenue”: underlying revenue = payments revenue + first 1% interest income from customer balances. The idea is that Wise intends to give back 80% of interest income ABOVE 1% back to users, and hence the first 1% plus payments revenue constitute the core income for company evaluation. In practice, the share that’s given back has been much lower (~33%) since they’re not allowed to pass on interest income for balances held in the UK per their licensing agreements. 

The management gave guidance for medium term 13%-16% PBT guidance (for underlying core revenue), which corresponds to 20-23% in adjusted EBITDA margins, even though the company finished 2024 with 21% PBT and 28% adjusted EBITDA. The management also announced they’re cutting FX take rate by ~3bps. 

We believe that the guidance is a bit too conservative and that unless Wise invests hugely into new initiatives in the future, the EBITDA and PBT margins are likely to beat the guidance in the next few years. 

Cross-selling and growth of ancillary revenue has been consistently driving up the top line despite FX rate cuts. Looking at operating metrics, marketing expenses and overall admin expenses (G&A + S&M + R&D) has come off in recent years as the platform continues to scale. There’s no current plans that would imply a faster than expected investment in personnel or capex. Hence the EBITDA margin will likely stay close to 2024 levels. 

In addition, the strong unit economics is also worth noting - Wise acquired 5.4 million new customers with £37 million in marketing budget and estimated £251 million in marketing and customer servicing personnel cost , putting CAC at £53. Overall customer increased by 2.9, implying a 2.5 million, or 25% churn. With each active customer contributing £103 per year, the CLTV / CAC ratio is a very high 7.8x.

The extra bonus - interest income above 1%

Although the core thesis is around strong volume and take rate growth of the core thesis, the additional interest income provides the cherry on top, as we can say with some confidence that global interest rate won’t fall below 1% any time soon. The net impact from additional revenue, which is 100% cashflow flow through, was £240 million, which is set to grow as the customer balance grows at the same pace of processing volume, providing an extra 2-2.5% in FCF yield. 

Valuation

Wise trades at ~10x EBITDA and a 5% underlying FCF yield (ex-Interest Income above 1% from customer balance) and a ~7.3% gross FCF yield including current interest income.  We think recent TPV pressure is likely to prove temporary and that over time it will track active customers.  We see Wise’ continued investments in the product, service & price as clear & sustained drivers of market share gains, and the large TAM suggests an attractive long-term growth opportunity.  If we’re right that Wise can grow TPV in the low-20% for several more years, we should get paid a handsome ~25% Carry, and the stock could easily return to the 13-14x EBITDA it traded at in March (up 35-40% from here).

Catalyst

Global rate cuts and macro recovery in Europe driving Volume per Customer back to positive growth

Earnings beat management guidance