Should you invest in Wise?
Audio Brief
Show transcript
This episode delves into Wise PLC, a fintech company disrupting cross-border payments, featuring Simon Erickson from 7investing.
There are three key takeaways from this discussion. First, Wise's "Platform" partnerships are critical for scaling its transaction volume. Second, its mission to make transfers "eventually free" is a long-term strategy to build a powerful network effect. Third, Wise's ancillary revenue streams from interest income and asset management fees are crucial for future profitability.
Wise revolutionizes international payments by matching transfers locally, bypassing traditional correspondent banking. This efficient model significantly reduces costs and speeds up transactions. The Wise Platform, an API, allows other financial institutions to integrate these services, leveraging their customer bases for exponential growth.
Wise's core strategy, termed "Mission Zero," aims to reduce its transaction fees to "eventually free." While seemingly counter-intuitive, this approach drives immense volume and market share. It builds a strong competitive moat by making its service indispensable, despite potential short-term pressure on take rates.
To offset declining transaction fees, Wise generates substantial ancillary income. This includes interest earned on customer balances held in multi-currency accounts and fees from its "Assets" product, which allows customers to invest their balances. These diverse revenue streams are essential for sustaining growth and profitability.
A detailed valuation analysis suggests the market significantly undervalues Wise. Despite strong growth in transaction volume and free cash flow, current valuations imply very low future free cash flow growth expectations, a rate the company has historically far exceeded. This indicates a potential disconnect between market perception and Wise's operational performance.
Wise PLC presents an intriguing investment opportunity due to its disruptive model, strategic growth initiatives, and apparent undervaluation.
Episode Overview
- This episode is a deep dive into Wise PLC (LSE: WISE), a fintech company specializing in cross-border payments, featuring guest Simon Erickson from 7investing.
- The hosts analyze Wise's innovative business model, which disrupts the traditional, inefficient correspondent banking system by using local liquidity pools.
- The discussion covers Wise's core products, financial performance, and long-term mission to make international money transfers "eventually free."
- A detailed valuation analysis suggests the company appears remarkably cheap, with the market underestimating its future free cash flow growth potential.
Key Concepts
- Correspondent Banking vs. Wise Model: The episode contrasts the slow, expensive, multi-step traditional system for international payments with Wise's efficient model. Wise matches transfers locally, avoiding actual cross-border fund movement, which significantly reduces costs and speeds up transactions.
- Product Suite: Wise operates through three main product lines:
- Wise Account: A personal multi-currency account for individuals.
- Wise Business: A similar offering tailored for business customers.
- Wise Platform: An API that allows other banks and financial institutions (like NuBank) to integrate Wise's infrastructure and offer its services to their own customers.
- "Mission Zero": A core part of Wise's strategy is its mission to make money transfers "eventually free." The company actively works to lower its "take rate" (the fee it charges), passing savings to customers to drive volume and capture market share.
- Ancillary Revenue Streams: While driving down transaction fees, Wise generates revenue from other sources. This includes interest income earned on customer balances held in Wise accounts and fees from its "Assets" product, where customers can invest their balances into stock funds.
- Valuation Thesis: The analysis suggests that despite strong growth in transaction volume and free cash flow, the market's expectations are low. A reverse discounted cash flow (DCF) model indicates that the current valuation only requires about 5.5% annual free cash flow growth for the next decade, a rate the company has historically far exceeded.
Quotes
- At 01:31 - "Let's just take a minute and explain like why they are Wise, why they're different." - Luke Hallard setting the stage to explain Wise's core business model and its disruption of traditional banking.
- At 02:54 - "No money actually flows. They just debit you, they credit me, and the transaction's complete." - Luke Hallard providing a simple, powerful explanation of how Wise's model bypasses the old, inefficient correspondent banking system.
- At 16:05 - "Is this right? Have I got this right? This company seems so cheap. What am I not understanding?" - Luke Hallard expressing his surprise at the low growth expectations implied by Wise's current market valuation, forming the core of the investment thesis.
- At 28:02 - "It's such an interesting opportunity... I've focused a lot in my professional career on disruptive innovation... there's certain things you look for that tend to support disruption. This checks the boxes for that." - Simon Erickson summarizing why Wise's business model fits the classic framework of a market disruptor.
Takeaways
- Investigate Wise's "Platform" partnerships as a key indicator of growth. This "coopetition" with other banks allows Wise to scale its transaction volume exponentially by leveraging the customer bases of its partners.
- Understand that Wise's mission to lower fees to "eventually free" is a long-term strategy to build a powerful network effect and competitive moat, even if it pressures margins in the short term.
- When evaluating Wise, consider its ability to generate significant ancillary income (e.g., interest on customer balances and asset management fees), which can offset the declining take rate on core transfers and power future profitability.
