Chit Chat Stocks - Why Ryan Is Buying This European Fintech Disruptor (WISE Stock Report)

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Starting point is 00:00:43 no per contract fees and up to 18 cents on every contract traded see why nerd wallet recently awarded public five stars for options trading and start earning up to 18 cents per contract traded only at public.com. This is paid for by public investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description, US members only. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this

Starting point is 00:01:32 episode. Okay, welcome in to Chitchat Stocks. My name is Brett Schaefer, and as always, joined by my co-host, Ryan Henderson. Today, we are doing our Wednesday. Well, I guess we've been mixing it up in 2024, trying to spice things up, but we're doing another stock research episode. We know the loyal listeners, the ones that have been around a long time, the ones that stick around, like these episodes a lot. At least we get notes on that all the time. So we keep doing these at least once a month for each of us. So in total, about twice a month. And we are hitting FinTech and Remittance Disruptor Wise, formerly TransferWise. You may have heard of the brand before. This one has been researched by Ryan. So he's done all the research. I haven't even

Starting point is 00:02:26 looked at everything he's done yet. So I'm going to be reacting to a lot of the stuff he's saying. And I'll be the one asking questions in a semi-formal interview style. Two housekeeping items. There will be a newsletter associated with this podcast. There will be a link in the show notes it's going to have a lot of the notes ryan made and a lot of the charts that we're talking about on this episode that i think will help if you're looking at wise you know maybe you're just listening to the podcast not watching it on spotify or youtube you can it can be really helpful to visualize some of the things that ryan's talking about here and then the last thing if you are listening on spotify or apple take about five seconds out of your time here and

Starting point is 00:03:09 give us a little five-star review on either of those platforms as a free show. That is the best way to help us grow. So Ryan, let's get right into it. Maybe we can talk about how you discovered Wise, what Wise is, how it runs its business. How I discovered it is actually, it's probably the way I most like to discover an investment, which is through actual product experience. So kind of one of those wow moments where you're like, oh, okay, I really like using that service, that product, whatever it is. Obviously, good investing usually requires a little more due diligence than that, but it's helpful to automatically understand what the drivers are for customers because then you can kind of get a better grasp on what drives purchase decisions, whether or not that's something that'll last or whether that could be temporary. So I came across it looking for a remittance service, trying to transfer funds into a different currency, and I really enjoyed it, and it ended up being one of the cheapest solutions. So we're going to talk a little bit about what it is and what their business lines are, and then I'll go through some of the history to kind of – so I'm going to start with the basics, what drives the business, and then I'll take a step back and walk through kind of the history.

Starting point is 00:04:28 I don't know why I chose to arrange it that way, but that's how I'm going for it. So if you go to their wise homepage, you're going to say we are on a mission or the web page is going to say we are on a mission to build money without borders. Basically, how do you rate that mission statement? One of the better ones, I think. I mean, it's OK, right? Yeah, I like it. It's better than some of the old ones like Peloton, right? Or I can't remember what they had, but some of them of these new age companies are quite cringy, I guess.

Starting point is 00:05:00 And this one actually, it makes sense because it's basically helping people save money. And as you're going to talk about, foreign exchange fees are still wildly high for some of these legacy services. Yeah, very high. And yeah, I'd say probably the weirdest mission statement I've ever read was the WeWork one, where it said we are building the We economy or whatever it was. Well, they still are. Yeah, touche. All right, well, let's start with what WISE actually does. So they are, I'll say a platform, but really it's just a mobile app and a website that

Starting point is 00:05:35 gives users a multi-currency account where they can hold, receive, send, or spend money. And they do this primarily, they basically have four products. There's other stuff. I mean, they say they're launching new features every day, but really there's four products that drive the business. So the first one is just transfers. This is what their original service was. It was known as TransferWise.

Starting point is 00:05:59 It's what they're most known for, and it's exactly what you would think it is. They allow individuals and businesses to easily transfer money to people in different countries or not even to different people. You can just transfer the money in your own account, and they charge a small upfront fee for each transfer. And the fee they charge depends on the corridor. So it depends on the country-to-country transfer, like which countries and currencies you're exchanging. So that's where the variability can come in. And we're going to talk about how they're able to offer the lowest rates, which that's a big crux of this entire thesis here is that they are the low-cost provider for transfers. We'll talk about that in a little second – in a second. But generally, it's pretty low cost for a transfer and they have a certain part of it that's a fixed rate and then they have some certain corridors where it's variable. So it kind of changes and part of that really is not up to them.

Starting point is 00:07:00 It's up to kind of the jurisdiction that they operate in and they have to sometimes go through partners as well. But I'm going to talk about that in a second. Within the transfer segment, there are two types of customers. There's individuals like myself and then there's businesses also like myself because Chit Chat Stocks has a wise account. We are customers, active customers actually. And so on the personal side, they have 7.1 million active individual customers. And that is, I believe, monthly actives, IP quarterlies. But the people that transact on Wise annually is much higher.

Starting point is 00:07:38 And so the average individual customer actually transfers about $1.3 thousand every month. And keep in mind, it's the actual transfers where they're earning money. They earn money in some other ways as well, but that's where they take that little fee. So the transfer volume is an important KPI to keep track of. And in total, Wise processes $28 billion per quarter from their individual customers. On the business side, Wise now has 392,000 business customers, so way more individual customers. However, where individuals tend to send just over $1,000 a month, businesses send about

Starting point is 00:08:14 $9,000 every month. So it's a higher value customer, if you want to call it that. And these are really small, medium-sized businesses. They're not going after enterprises. This is, if you are a startup podcast, just random example there, a startup podcast, and you wanted to market your show on an international podcast or something like that, you could have whoever you're marketing that show with, you could have them set up a wise account and you can easily transfer the funds to them.

Starting point is 00:08:46 They are very transparent about who the cheapest transfer provider is. And there's actually this link. If you go to wise.com slash us slash compare, you can see, you can type in the transaction, like what currency to what currency, how much, and it will list you out its competitors. In some cases, who is going to be the cheapest provider? Because sometimes it's money, money grams. Sometimes it's, I mean, it's, it's never PayPal, but some, sometimes there's other providers that are cheaper and they're really forthright about that. Sorry, one second. I'll stop there because I need to take a drink of water, but also, so I'll let Brent intervene here. Let me comment on the personal side or maybe in the business side as well. For anyone that can't visualize how someone would use Wise, maybe you're someone that hasn't used remittance services before. Let's say you're someone traveling to Latin America. There's a lot of different countries. It is very easy to deposit money to yourself with, or excuse me, transfer from, say, U.S. dollars to whatever currency you're using there and have it in your Wise account. And you can pull, as we'll talk about, with their Wise card from a local ATM and get cash, but also spend it in a local currency if that's what you want.

Starting point is 00:10:04 But the main choice of what people will use here is sending money, let's say you are a European student, college student, you're in the United States, your family's over in Europe, obviously you need a good way to transfer money back and forth, and you'd rather not pay 3%, 4%, 5% fees on these legacy services, especially because in the digital economy, it doesn't really matter some of those old things that they offer customers. And all you need to do is get essentially the money from one smartphone to the other. And Wyze can do that, hopefully, as they say, as cheap as possible. And they still talk about basically declining fees to zero over time or as close to zero as humanly possible. Is that still on that mission statement? They still talking about that a lot, Ryan? Yeah, although the take rates kind of stabilized lately at this.

Starting point is 00:11:00 I'll talk about the rates here in a second, but let me go through the rest of the products first. So the wise card is their second, I guess I'd call it their second biggest business, but this is just a debit card. It's powered by Visa and MasterCard. And the reason this is valuable, Brett just mentioned it. Some credit cards have complications spending abroad, same with debit cards. And even if you think, even if your bank tells you, oh no, yeah, it's no problem at all. There's typically hidden fees associated with it, or they will give you like a fake currency conversion rate. Like they'll embed the fee into the currency conversion as opposed to having a straight up fee. And it's just, it leads to a whole bunch

Starting point is 00:11:43 of extra expenses. And so the wise debit card allows you to transfer and spend money from your account really cheaply. I estimate that the wise card accounts for roughly 20% of wise's overall revenue. It's a little hard to guess because it's categorized under other revenue, but it's the largest segment there. So that's kind of the second biggest business. It also just adds a little bit of functionality to the app. So if you're a customer and you get some money transferred in, it's more incentive to keep the money in the wise account, right? Because you can just spend directly from it. So there's no need to transfer it out to your bank account. The third product here, which is really important is the high yield cash account. This is, I think businesses probably

Starting point is 00:12:33 use it more, but it's for individuals as well. And so if you're holding cash on wise, you can opt in to earn interest. It's not that complicated. People are probably familiar with this, how this works. But last quarter, the total customer balances held on Wise was just under $17 billion. That's up from $5 billion three years ago. Wise gives you that high yield depending on what geography you're in. And then it actually earns a little spread as well. So this is really common. I'm not exactly sure what they're investing in. I'm guessing in the US, they're buying treasuries and they are giving you 4.85% and then maybe treasuries are yielding five and they can just capture the difference. But it is really shooting up lately in terms of the

Starting point is 00:13:21 interest income here because people are saying, oh, okay, I can get 5% or 4.85% on my cash if I hold it in wise. So I'm going to keep it there. More and more people are holding balances in wise, not to mention they can also spend it with the wise card so last quarter wise earned 132 million dollars in interest income from just customer balances which is that's huge i mean i think it's around 30 it's 27 of wise's overall revenue and it's 100 margin right there's no cost associated with it so it's helps profit margins uh it's elevating profit margins relative to what they've had historically okay and that's net interest income so yes yeah yeah sorry yeah they report it actually as a revenue line um but it's x the interest that they're paying out to

Starting point is 00:14:21 the customers right right just wanted to confirm that because it is going to be a small spread and is i guess an advantage for them because this is not their primary business uh versus a bank where This would be their primary mode of making money. And just as an example for us, we have our American bank account that we use for just our business that we started up, a pretty basic one, and it pays a terrible interest rate. And we can pretty seamlessly transfer money from that bank to Wise and then have Wise earn 4.85%.

Starting point is 00:14:58 So given that we don't have this daily need to spend that money, and it's not like we're a business that has that sort of liquidity problem, we can just store money there. And it's a really easy incentive for us to go for 4.85% versus what, like half a percent on the checking account. So it just makes total sense. And you can see why the numbers have ballooned here, especially as Ryan mentioned, for these business customers. Yeah. And I'm going to talk about it, but there's kind of this network effect that's included as well, where if I'm constantly sending money out of the wise account and I'm spending money out of my wise account, it's all the more reason to keep the money there in the high yield cash account because it's right at your disposal. And I think this is a tailwind that I didn't really mention throughout the rest of the episode. But as more and more businesses operate globally and you have employees all over the world, I think it's a huge tailwind because this is one of the cheapest ways to pay them, especially if you're a small business and you're looking to outsource to certain geographies. This is really – I think that's driving a lot of volume growth for Wise.

Starting point is 00:16:12 The last thing I'll talk about in terms of products is just the Wise platform. This is really a small piece of the pie, but it's basically their enterprise business. So I assume pricing is kind of custom. They're not very transparent about it, but it is basically banks, brokers, really fintechs that want to plug into Wise's payments network, which I'm going to talk about what that payments network is here in a second, instead of going through the Swift network. so they can let their customers have better remittances from their bank by using the Wise platform. To sum things up, Wise helps people transfer money. And because they're typically the lowest cost provider, it has been sticky and it's caught on with lots of customers. Wise is also layering on some additional features, which helps keep the customer funds on the platform and helps grow revenue faster than volume. I'll stop there. I'll let to kind of intervene here yeah let's talk about the history uh how did they get started a little bit of fascinating history with these two i believe they're both estonian founders and what

Starting point is 00:17:20 does you know how does the product history getting started back in 2011 lead to today and what they've built with the wise network and maybe to add in here do you think there's any advantages maybe as your conclusion here any advantages to what they've built versus what any other fintech startup could achieve. Yeah. So just in general, I learned this when we studied Visa, but sometimes the best way to wrap your mind around a competitive advantage or why a business has been able to grow is to look at the history and how it actually started, because then you see what the original customers were thinking and why they latched onto the service. So I'm going to go through that for Wise and hopefully we can get a sense of whether or not we think it'll last. Wise was started in

Starting point is 00:18:09 2011 by Tavet Henrikus and Christo Karman. It was kind of born out of a frustration that they had where they were both from Estonia, like Brett mentioned, but they were working in London and Christo was being paid in pounds. However, he had a mortgage back in Estonia that he had to pay, so he was having to transfer money into euros. I think it was called Estonia. It got changed at some point, but Estonia was using euros at the time. So he was having to transfer the pounds into euros. And initially, he was going about the traditional process, going through the banking system. And as you can probably guess, he was losing tons of money to fees in the process.

Starting point is 00:18:51 And here's why that process is expensive to begin with. So I'm stealing this quote from – I can't remember the exact source, but I believe it was a Wise page. it says regular banks usually process international payments with the swift network a messaging system that's been in operation for around 50 years it's established and reliable but it's not often fast or cheap that's because swift swift transfers can involve one or more intermediary or correspondent banks moving your money along until it reaches the destination account this takes time to arrange and the banks involved can also charge a fee pushing up costs so crystal was looking for a way to get around this. And fortunately for him, he had Tevet, who was his co-founder and a friend,

Starting point is 00:19:38 where they had enough trust that they could make this work. So the way that Christo circumvented this transfer process is instead of transferring the money from London bank account to Estonian bank account, keep in mind here, Christo and Tevet both had bank accounts in each country. Tevet would take the euros he was receiving, he was getting paid in euros and Christo was getting paid in pounds, he would take the euros he was receiving and put money into Christo's Estonian account. And in exchange, Christo would replace the amount into that UK account with pounds. So they were basically trying to, they were just moving the account balances up in each other's accounts without actually transferring it across the

Starting point is 00:20:20 borders that is the main principle of what wise still does today just at a much larger scale so they launched this they at first they were like oh okay this is kind of nifty why don't we set up accounts in both countries and we'll get some co-workers whoever else is in the situation to try to use the service and that was transfer wise and it worked pretty well it caught on with a lot of adoption obviously this is a pain point for a lot of people i mean they're just directly losing money every time. And so it's still how the business operates today. If you go and look at their company page, it says when you make a wise payment, you fund it by sending money to the wise local bank account in whatever country you're sending from. Wise then passes on the

Starting point is 00:21:07 equivalent amount to the recipient from their account in the destination country. So it's a little hard to visualize because we're talking about so many different accounts. But Brett, If you share your screen and show what this looks like, just think about it as you have bank accounts essentially set up for you in different countries, and your balance when you submit to WISE goes up and down in the various countries, but it doesn't actually cross the border. Is that kind of an apt way to describe it? Am I making sense here? Yes, I think so. So it is essentially a loophole that helps them save money. I don't know exactly how they manage this, but I assume that the corridors, when I mean

Starting point is 00:21:57 corridor, let's say, for example, you had Australia and Thailand there, the corridor from Australia to Thailand probably has a somewhat consistent payment base because you have your reliable customers there. So they can almost predict what the payment flows will be. It's not like the payment flows from Europe or excuse me, the U.S. to the United Kingdom is going to 10x overnight. It probably has a standard rate and it'll grow alongside with the business. But I think it's a really innovative way. Yes, obviously, someone like Western Union could copy this, but then they would have to lower their fees.

Starting point is 00:22:31 And it's a bit of a innovator's dilemma, which I like. And as you're about to mention here, the take rate they offer that they take on these fees is just much more attractive than what someone like Western Union or your standard bank might offer. Finchat.io is the complete stock research platform for fundamental investors. They have all the standard financial data on more than 100,000 stocks globally. And beyond that, they have company-specific segment and KPI data on more than 1,500 stocks. So to give some examples here, you want to see Netflix's average revenue per member over the last 10 years. They've got it. You like to track YouTube's advertising revenue.

Starting point is 00:23:12 They've got that, too. If you want to see Celsius's revenue that comes from Costco, how much of their revenue comes from Costco, they also have that. So the breadth of FinChat segment and KPI data truly is one of a kind. I use FinChat every day to track and manage all my investments. I also use it to discover new investments. And if you want to get 15% off any paid plan, go to finchat.io slash chitchat. That's finchat.io slash chitchat to get 15% off any paid plan. The link will also be in our show notes.

Starting point is 00:23:47 Be you, be you. Sound the alarms. We have a new sponsor alert. That's firmreturns.com. It's a stock research blog. Our friend runs that and it covers companies from all around the globe, but it leans really more towards the UK as that's his home market and it gives him easier access to management. And he provides ongoing updates on the companies that he's invested in, as well as

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Starting point is 00:24:52 you can go to firmreturns.com slash chitchat. That's firmreturns.com slash chitchat and it'll get you 20% off. Yeah, and maybe I'll give an example here to hopefully make this make a little more sense. Let's say Wise has accounts in England and accounts in the US, and both accounts have $100. I, in America, if I'm sending money to that English account, whether it's someone else's, Yeah, let's say I'm sending it to someone else. Let's say I send $50.

Starting point is 00:25:27 $50 goes to the Wise account in the US. They now have 150 in the US account. That money does not go to England. The English account just drops by 50. So that money goes through Wise in two separate accounts. And the English account will then send 50 pounds or 50 US dollars in pounds, whatever the equivalent is, to the English account. So the money isn't transferring borders.

Starting point is 00:25:52 Maybe I'm going over this too much, but I hope it makes sense here. I think, yeah, it makes sense. I would say that they're not doing this on 100% of transactions, right? But their goal is to do this as much as possible to save costs and offer, as you're about to mention, these lower fees. That's right. Yeah. So what we just talked about, that's kind of their direct connection.

Starting point is 00:26:11 That's where the lowest fees are going to be. But then there are certain countries where they still have to go through partner banks and it's more expensive. But in general, this system of local accounts has become their own infrastructure and it's way less costly. To give a little context, the global average cost of sending remittances in Q1 of 2022, so this data is a little out of date, was 6%, 6.1% actually. And that's come down over time, but that is super high. And that's according to the World Bank's Remittance Prices Worldwide Report from June 2022. Wise, on the other hand, averages a 0.65% take rate.

Starting point is 00:26:49 So literally 10 times less costly, if I'm thinking about that right. And it's profitable as you're going to go through the financials. It's not like they're doing this like a crazy, as you mentioned, we work. It's not like they're just saying, we're going to have terrible unit economics and run this business with cheaper costs, but they're actually making it work, which is quite fascinating. I think quite exciting. I will say as a side note, we probably don't have time to cover this on this episode, but when you look at Wise and you look at those fees and you look at the comparison charts,

Starting point is 00:27:18 it does not make me bullish on good old PayPal. It does not. No, it does not. And given, I don't know how much international transfers is really that big of a PayPal business. PayPal is not the largest player here, actually. I mean, the banking system is the largest player, but Wise has already kind of stolen share from most of the remittance companies. But let's give some numbers on their growth. It seems like, although I don't have data that goes all the way back to the founding. Ever since they launched in 2011, they've been growing pretty rapidly in terms of customers. The earliest data I found is Q1 of 2019. So at that time, they had 1.4 million total active customers. This actually predates even FinChat's data,

Starting point is 00:28:05 which is already pretty extensive. But last quarter, they had 7.9 million customers. So they've gone from, in 2019, 1.4 to 7.9 million active customers in the most recent quarter. And I think probably the most attractive part of this is they're really not spending that much money on marketing in the process. So it seems like their network effect is really beginning to take hold. In the last 10 quarters, last two and a half years, Wise has added more than 4 million accounts. In the first 10, 11 years of its existence, it added 3.9 million. So they've added more in the last 10 quarters than they did in the 10 years prior. That's really kind of showing, I think, that the more people that are on the service, the more they become the next,

Starting point is 00:28:55 saying that wrong, they become basically salesmen. They want other people to join the platform because it reduces the friction, it lowers the cost for themselves to transfer money. And in general, the remittance market is huge. It's estimated to be about $25 trillion. 50% of that comes from enterprise customers and the remainder comes from SMBs and individuals, which is really what Wise is going after. You can see over the last 12 months, Wise has processed about 146 billion USD in volume. So it's still a small piece of that remaining, I guess you could call it $12 trillion pie, but they are starting to eat share from the remittance market. I'll kind of stop there. Do any of these numbers stand out to you? I mean, obviously the

Starting point is 00:29:45 growth has been pretty impressive. Anything in particular that you liked here? Yeah. I mean, their customer acquisition makes sense. The fact that they only have 7 million customers is also quite attractive because if you look at someone like PayPal with what, like three, 400 million, There is still a long runway for Wise to reinvest as long as the same sort of efficient marketing, customer acquisition strategy, the network effect can work for the next 7 million versus this prior 7 million. And we will talk about maybe the competitors with Remitly and stuff like that and how Wise may be going for a different but more valuable customer base as opposed to the immigrant corridors that Remitly is going after for Latin America. But I think the biggest thing that stands out to me, because why is it not just going after these individual customers sending on the remittance corridors, is the fact that they're only, and this was December 2023, they are a UK company, so they're not doing quarterly reports. It's one half updates, is $146 billion, I think it's dollars, in volume versus the $25 trillion market opportunity. What is that less than?

Starting point is 00:31:01 That's less than 1%, for sure. i mean less yeah slightly it's a little yeah like either way like the the market share is so low and the fact that they're attacking this with with such a disruptive take rate versus the legacy solutions leads me to believe this is a i mean we talked about it we covered them i think two years ago on a not so deep dive and i i think i'm in the still the same position today where it's almost a textbook innovators dilemma situation, which can be quite attractive. Yeah. And it depends how you characterize the market, right? So that $25 trillion, that's full global remittances across enterprise to individuals.

Starting point is 00:31:43 If you cut out enterprise, it's more like $12 trillion. And that includes bank transfers and non-bank entities. So the money grams of the world, stuff like that. Then they actually are starting to have a somewhat sizable share at 150 roughly billion in volume so they are one of the leaders globally in the remittance space but i'm going to talk about what has actually allowed them to grow because the numbers are impressive and if you look at the revenue it's absolutely insane they've gone from 28 million dollars in revenue to more than 1.4 billion over the last eight years which is just a staggering staggering growth rate and i will pull up this chart i am sharing for anyone who wants to watch these they will be on youtube as well and spotify i am sharing a lot

Starting point is 00:32:37 of these charts um and it just can help along and if you are listening at this moment these charts will be in the newsletter it's all free just go check them out if you want to look at these or go check out our friends at finchat.io all right i'm gonna share the screen okay so what has enabled them to grow so quickly. First and foremost, being the low cost provider just helps. I mean, it's really good for word of mouth marketing. When you go online and you explore your options, you're going to find that WISE is probably the lowest cost provider. I also like these situations because I love it when your customers become your best salesman. And that seems to be happening for WISE. And it's really powering this network effect,

Starting point is 00:33:22 not to mention they've leaned into it they had like it seemed like almost an insane affiliate program because it was just like if you get someone to sign up and send money on wise for a while it was we'll give you a hundred dollars and people were people were constantly doing it sorry if you can hear that siren driving by we can hear that one but the you know ryan live in the good old city of seattle gotta be some sirens there hopefully it doesn't last too long yeah it So it's just a strong network effect. It's way more convenient for me as a podcaster. Like I said, we used this example earlier.

Starting point is 00:34:00 If I'm advertising somewhere, I would really prefer to avoid the PayPals of the world or avoid the wire transfers and just have someone set up a Wise account. It makes it so much easier. So that helps grow accounts. also they've done i noticed this and i don't really know how to quantify this but i've noticed that they're really good with content marketing in a way so like when i looked up lowest cost transfers or something on google you're going to find probably a wise page a wise blog post that that has a list of them they're really top ranking on a lot of these services and they've done a great job kind of getting valuable digital real estate there on the first

Starting point is 00:34:49 page of google so i think that's helped and then the other part that i like is they aren't really adding like useless services not to call out some of the other fintechs but like adding all the equities trading and the options trading if you're trying to do that like some of these fintechs are trying to add every product possible whereas wise has basically just added two products that really help people, right? The debit card and the high yield cash accounts. 48% of personal customers use more than one product and 60% of business customers use more than one product. So you can see that it's actually driving some real adoption within the customer base. Yeah. Excluding that platform segment, you essentially have send, save, spend.

Starting point is 00:35:33 Yeah, pretty much. And one question I have for you, you've managed this more for us from an anecdotal perspective. I'd like to hear this. You said when you talk to an advertiser, any sort of vendor that we have, you ask them if they can set up a wise account. Is it pretty frictionless to set one of those up? Are they really good at having people go, hey, I want to sign up for an account. It takes me two minutes to connect my bank account because I know a lot of people get frustrated with signing up for these new financial services. And you can lead them astray if they spend 10 minutes and go, i'm just not getting this work yeah i think it's pretty seamless so full transparency for the

Starting point is 00:36:16 podcast i don't do it our man behind the glass does it which i it's nevertheless i'm sure it's easy for him as well but i do this for finchat actually um we use wise for a lot of our transfer services and anytime that you know we have to pay someone and they don't have a wise account it's really, really easy to set up. And then you basically just ask them for their wise tag and you can instantly send them money. So it's a very simple setup process, not to mention there is that affiliate thing that they've got going, which seems like it'd be expensive, right? If you're paying someone just a hundred dollars for every time they bring on a new customer, but you think about the money they're going to earn

Starting point is 00:37:00 over the customer's lifetime, it probably pays off, especially if it's a multi-product user and during a high yield environment. If someone's a send customer, this is just excluding debit card, excluding the bank account, which I guess isn't technically a bank account, but we don't need to get into the details there. The send customer,

Starting point is 00:37:20 if over their lifetime, they're sending $100,000 as a consistent remittance payer and the fee is 0.5%, that's 500 bucks right there. And this, so I talked about what's driven the customer growth, having a great product,

Starting point is 00:37:36 Having your customers become great salesmen, great content marketing, really easy to set up, self-serve is seamless. But the revenue growth is outpacing volume growth because of what we talked about. The additional products are actually getting good traction, right? You're earning the spread on the interest, and there's small fees included in the debit card as well. And the debit card really, it's basically just a creative to the transfers business because essentially you're just creating small transfers within your account before you spend it in a different country. So they're just taking that similar fee that they're doing if you were to transfer it to somebody else. Anyway, it's kind of besides the point. Let's get to the cost.

Starting point is 00:38:18 Let's get to the unit economics of this business because this is a profitable company and a very profitable one. So I'm going to go through kind of the basics. Wise has roughly 76% gross margins, which is quite high for a fintech, especially since most companies plug into either Visa or MasterCard and they eat away at half their revenue. That's not the case with Wise because Wise, other than on the cards, they're circumventing the – they don't need someone to process and settle transactions. They just need a remittance network, which they built themselves. The bulk of the cost of sales really just comes from the bank and partner fees. So I mentioned sometimes they don't have a direct connection. They have to go through partner banks in certain jurisdictions.

Starting point is 00:39:05 And that's where they're going to have to pay out those partner fees. So that's where you're getting that 24% cost of sales. But the bulk of Wise's costs come from investments in their workforce and just other operating expense lines. So of the $900 million in gross profit that Wise generated, I guess this would have been last fiscal year. So this is not trailing 12 months, which I'm going to talk about in a second, which- Darn European companies.

Starting point is 00:39:33 Yes, these darn European reporters. Almost every... I know we want to talk about holding stocks for multiple years, but it is nice to get this information every quarter and not be talking about stuff that's 12 months ago on a podcast or when making an investment decision. And it is another example of, yet again, every investor relations thing in Europe is just superior in the United States. Yeah. So of the $900 million in gross profit that Wise generated in 2023, they spent just under $600 million in operating expenses.

Starting point is 00:40:06 The majority of those operating expenses are administrative. So bulking up their product development teams, their customer service teams, marketing teams. actually keep in mind here that they include marketing personnel as administrative expenses and not marketing costs. So when they say marketing expenses, it's strictly straight up marketing, like advertising. In the last full year, this might surprise you, Brett. They spent $47 million on marketing. And this is a one, last year it was a $1.2 billion revenue business. Does this surprise you? I don't think so, given the fact I knew they were profitable, but it's nice because they don't have to spend that much to acquire

Starting point is 00:40:48 customers. And if they want to, let's say they want to inch this up to $100 million, $200 million, $250 million over the next three to five years, you can see, given the unit economics of the margins you're going to talk about here, the gross profit levels, you can see how they'll still get positive returns, even if they have to inch that up. So it's just a, gives them flexibility. It's a nice place to be. Yeah. And as far as they're, you know, sometimes these younger companies, I can tend to have gripes with their, the way they manage the income statement, but with Wise, I tend to like it. It honestly reminded me a little bit of Adyen in that they have kind of managed expenses somewhat well. Here's a quote from the last

Starting point is 00:41:33 year's shareholder letter. He says, gross profit provides us with the capacity to cover our operating expenses, invest in building a better experience for our customers, and of course, provide a healthy and growing stream of profits to our shareholders. Through reinvestment, we deepen our competitive advantage with infrastructure and products that continually improve, attracting more and more customers, which leads to more gross profits to reinvest. And so the cycle continues. I like the way they think about it. They had 30% roughly operating margins last year uh so they aren't and if you actually look at the salaries of a lot of these employees it's way less than what you would have to pay if you were based in a san francisco

Starting point is 00:42:14 or a seattle or any u.s based fintech really or new york yeah it's that is the beautiful thing of europe uh thank you guys over there for helping the help on the margin stay so i but i mean it makes sense because they began in europe they have i believe the original market was the united kingdom that's where they're launching usually they're like when they have a new product that's the first place they typically launch i believe that's where their headquarters is correct so it makes sense that they're they're centralized in europe that's where their core market is okay let's go through the management team here i think i've covered the business fairly well i think it's advantaged they've built out their own infrastructure and it's growing really quickly

Starting point is 00:42:59 and yeah it seems like a business where or god as i say it just seems like a business where growth begets further growth that you know the more people that are on the service they become salesmen for the service itself and it seems to just kind of compound that network effect Earlier in the show, you heard us talk about the investing platform, public.com. That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract. NerdWallet recently gave public five out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded. This is paid for by public investing. Options are not suitable for all

Starting point is 00:43:42 investors and carry significant risk. Full disclosures are in the podcast description, U.S. members only. Yeah. And I was going to say our three questions that we like to ask are, can we be, is there any sort of prediction that we can make on the durability of growth or the durability of earnings due to a competitive advantage? And then we're going to talk about management here. Then another thing that we talk about, which we'll talk about at the end, is valuation. Those are our three key criteria to investing in a stock. Can we say, or at least, Can you say, I guess you know this business a little bit better than me now, are you confident in that first question, that first box on the list being ticked that the competitive advantage is there and can grow as they scale? Yes.

Starting point is 00:44:31 The only concern is that there are certain areas where I don't understand the compliance. I don't understand what it requires to set up accounts. I don't know if the ruling body or the governing body for payments can restrict them from having an account. My only concern is that there's some way that it could get disrupted by certain governments. But because they have so many corridors and there isn't any one currency that's really driving the business, I think it's probably built to last. But let's go through the second question. I think that was the second question there around management and proxy. They only report the compensation for two of their directors, which I found kind of

Starting point is 00:45:17 interesting, the CEO and the CFO. Another gripe I guess I have with the proxy statement is there isn't a proxy statement. It's just included in this super long annual report. But as you can imagine, they follow similar strategies to that of American companies. They pay them a base salary, an annual bonus, and long-term incentive awards. Their long-term incentive awards are based on two factors. One, total shareholder return relative to the FTSE 250, and two, volume growth. I honestly don't think that's too bad.

Starting point is 00:45:47 What do you think? Better than adjusted EBITDA. Yeah, total shareholder return relative to the FTSE is okay. It's probably better than, again, just saying we're going to hit a weak adjusted EBITDA target and then do that. But volume growth, I think, is nice because that's a nice incentive they have if they're trying to expand their competitive advantage. volume growth is the number one thing you need. It's just the number one thing that's going to drive this business. So I like that one. Another interesting sentence that came from the proxy statement. It says, executive directors are required to build and maintain a 300%

Starting point is 00:46:25 base salary minimum shareholding whilst in employment and for two years post-employment. So basically, if you're an executive director, you have to have, what is that? Four times your base salary in worth of shares, worth of wise shares. And that extends two years post-employment, which we're going to talk about here in a second is actually quite important because there's been a CFO resignation. So it's not like he owns that many shares, but if someone like Christo Karman had to sell shares, there'd be a two-year post-employment thing where he has to own more than four times his base salary. Let's talk about the share structure because it's a little wonky. So Wise has a dual class share structure where class B shares are worth

Starting point is 00:47:11 nine votes relative to class A shares being worth one. In total, the company has 1.4 billion total shares outstanding, 72% are class A, 28% are class B. And Christo Karman owns 26% of all the shares, but has 48% of the voting power. So he really runs this company, 48% of the voting power. basically he can make the decisions. It would be hard to replace him when he's got 48% of the voting power because you would need every other shareholder basically to be in agreement against him on any votes. The other part that's important here is the class B shares. They have high voting power. You can't buy them. They're not sold to individual investors or anything like that. And they have no economic interest. So as far as dividends go, as far as – yeah, I guess it's really dividends. You're not getting paid out anything for the class B shares. And they're also not really included in the market cap calculation, which is very important.

Starting point is 00:48:16 So a lot of the aggregators, FinChat, for example, have the right share outstanding balance. If you looked at it purely based on the annual report, you would think it's got 1.4 billion shares. It does not, which that's actually quite the difference in the market cap and the valuation. So just important to remember, base the market cap off of your class A shares. In general, I thought this was actually a pretty good proxy. However, there have been some departures at the company, which left me a little confused. So for starters, Crystal Carmen had some tax troubles in 2022 with the UK and had to pay a big fine. Sounds like he basically just didn't have his own personal affairs in order. He had to pay a fine.

Starting point is 00:48:58 It's kind of in the past now. But then last year, he took a couple quarters off as CEO. There was an interim CEO that came in. And at first, I thought, is this related to the tax trouble? But then he says it was for paternity leave. So he wanted to be with his firstborn child during this time, which I guess I get. I would imagine for someone with his wealth that he would be able to pay for care, but it sounds more like he wants to just be there during this time period. So I understand it. He's back now. It was just kind of a weird period to have an interim CEO for a little while around his tax trouble time as well.

Starting point is 00:49:42 So strange. But then it gets a little stranger. Sure. Matthew Breyers, the CFO, left the company or is leaving the company this year. At first, I was a little worried by this, but it turns out he was hit by a bus and now he's basically retiring to focus on his health. And I mean, I don't think we should read too much into this. He apparently has a really bad accident and he left for a little while. He ended up being okay, kind of came back for a year and now he's saying, I'm going to retire, just focus purely on my health. He's been the CFO since 2015. So if it were like constant new CFO coming and going,

Starting point is 00:50:26 then I'd be concerned. But I think with this, it's not really that big of a worry for me. Yeah. Just a lot of odd things happening here. It's interesting that the founder would leave like that because if you have the interim CEO, but you're going to be back in a couple of months, i'm sure he's like kind of still directing things but just from his fraternity i mean that's what i would imagine i would be like if i was the one that owned half of this business um the cfo thing obviously that you know that can happen and it's just kind of strange but i think this founder he seems to not care about or he doesn't really want his you know he wants to be private he doesn't want to be public his personal life all that good stuff um and the tax thing i guess it's

Starting point is 00:51:06 a slight yellow flag, but not a giant concern. If something like that repeated, I would be concerned, but nothing crazy. It's just kind of weird things happening with the management team that hopefully we don't want more executives getting hit by buses. Hopefully that's behind them. Yeah. I think in general, the CEO and founder who has built this business from scratch and done a really good job scaling it profitably owns 50 he's well incentivized for this thing to keep growing the cfo it's kind of a bummer that he's leaving because i actually thought he's done a really good job um but it's not like a concerning departure and then the proxy statement itself wasn't too concerning at all uh so i think management kind of checks all the boxes i'm

Starting point is 00:51:54 looking for let's talk valuation though because this is where i think it gets pretty interesting my preconception here was that i'm gonna go through this i'm gonna like the business i'm gonna think it's promising and then the valuation is gonna keep me out of it but after doing a little digging i don't think that's the case so if i use the share account from finchat which is the correct share account wise has a current market cap of 10.3 billion usd they have 1.1 billion in cash equivalents and $130 million in deferred tax assets. So around $1.2 billion in cash, roughly. They have $358 million in short-term debt, which is through a revolving credit facility. So too long, didn't read here. $10.3 billion market cap, $900 million in net

Starting point is 00:52:42 cash, $9.35 roughly billion enterprise value. Just think little under $10 billion. Now they don't report their income numbers until mid-June. Here's where it gets kind of weird. So they report like an official annual report with all the details every year, mid-June, and then they have a half-year report. But in the quarters in between, so Q3 and Q4 right now, they give a business update, but they don't release the annual report. So we know what the revenue numbers were for Q3 and Q4, but we don't have the income numbers and none of the aggregators, CapIQ, FinChat, whatever you're using, can track it because they haven't put out the official annual report. So a lot of the metrics that people are valuing this business on are way out of date. So I'm going to try to value this thing and there's going to be some guesswork involved here. But in the first half of the year, Wise generated 35% free cash flow margins. Now, in their little Q4 business update, they said that the gross margins in the second half were higher than the first half.

Starting point is 00:53:57 I think – I can't imagine why that wouldn't trickle through to free cash flow. I mean, they're getting more and more revenue from this interest income, which is like virtually 100% margin. So it seems like free cash flow margins would trend upward a little bit. So I am guessing for the second half of the year, free cash flow margins were around 36%. That would imply $346 million in free cash flow in the second half and $652 million in free cash flow for the full year. This is US dollars, right? $652 million full year free cash flow. All that is to say, if that's the case, if that's how much they did for the full year, they have an enterprise value to free cash flow of 14 times. That is way lower than I was expecting. And it's way lower than their trailing multiple if you go to the major aggregators. So I was pretty impressed by this.

Starting point is 00:54:53 And well, I don't know if I'd say impressed, but I was excited by it. And frankly, I think a lot of people are valuing it wrong because they don't have access to the income numbers, which is kind of frustrating. Yeah, I think that can – I can get with this. One thing I would say is some of it probably a working capital advantage, right? So maybe free cash flow a little bit. But I mean, yes, they have that advantage, but it's not, you know, the underlying earnings, as you said, what, 35% margin versus the operating earnings at 30%.

Starting point is 00:55:22 So not a big deal, but maybe valuation slightly higher. But yeah, it does seem cheaper. And I did a little quick check here while you were talking on FinChat. It seems like stock-based compensation, yeah, they have the IPO, so shares outstanding, jumped up a ton, but it seems like stock-based compensation is quite reasonable. So not too much there that you see with some of these fintechs, these software companies touting those 35% margins on free cash flow when they're spending 10% to 15% on SPC as a percentage of revenue every year. Yeah, they're like true operating or net income figures are really not that far or their NOPAT numbers really aren't that far off from the free cash flow or adjusted EBITDA figure. They talk about adjusted EBITDA a lot. Their adjusted EBITDA is 95% of it converts to free cash flow. So it's actually quite accurate. But yeah, as you mentioned, not that much dilution. I think I read this part of the 10K or not the 10K, the annual report where they said it was something about we don't want more than 10% dilution over the next 10 years.

Starting point is 00:56:32 Not bad. So, I mean, that would be – the growth per share would still be great here assuming that's – assuming that they continue to grow the way they have. So I'm going to do a little bit of modeling out here. I think it's reasonable that Wise could grow volumes by at least 10% a year for quite a while. They have certainly grown at that pace over the last 5, 10 years. And as I mentioned, there's a lot of tailwinds behind them with globalizing businesses, more and more people employing people elsewhere. The customers are becoming the best salesmen. So customer count is growing much quicker today than it was – nominally, it's growing much quicker today than it was three years ago.

Starting point is 00:57:17 People are using it for multiple services as well. So I think volume is well-positioned to grow by more than 10% a year. revenue will grow even quicker because of that interest income. Now, obviously, if interest rates were to plummet quickly, I think there's some risk here that the interest income could go away. But my assumption is 15% revenue growth for five years and steady free cash flow margins because I can't really see why they would change. If that happens, you'll get $1.3 billion a year in free cash flow. I don't think we need to go through that much difficult math here for a company with a $9.4 billion enterprise value, a growing company, if you're getting $1.3 billion

Starting point is 00:57:59 in free cash flow, it's cheap. It really is. So I really like it. I think the valuation is very reasonable, especially for a business that I think has tons of upside in terms of volume growth. Were you expecting the valuation to be different here? I was expecting it to be a little higher, yeah. And I guess the stock is down. I would have to maybe investigate a little bit why that is. Maybe it's this management stuff that people are concerned about, but it is down. And I remember looking at it before and thinking it was a bit expensive.

Starting point is 00:58:36 So I guess that's good. They've grown into the valuation and stock's down recently off of its all-time highs. I mean, I want to talk about risk and maybe a little bit on the competition. I know some people have talked to us about Remitly being a stronger company. I've seen, I pulled it up on FinChat as we were talking here. That's the nice thing about the platform is you can kind of chart and compare these companies. Remitly has been growing revenue quicker. Does that concern you at all?

Starting point is 00:59:03 Or I guess I might answer this question myself. I don't think it would because there's probably room for quite a few players, especially if They're targeting different niches where Wise is going for richer customers. Remitly is going for the Latin American immigrant core corridors more. Does competition concern you at all? And maybe the relationship with Visa and MasterCard, because I know they've talked about getting into Forex a little bit more. Is that a partnership or a I don't know. What do you think about that?

Starting point is 00:59:33 As I know, the term's overrated, but maybe it's not a black swan, but a white swan risk Visa and MasterCard. kind of, you know, having a lot of control at the end of the day. So I'm looking at the total active customer count here, and this might be slightly off, or they might characterize it differently, define it differently. Looks like Wise is a little bit larger. As you mentioned, the corridors are a little bit different. I think both of them can work out in general wise is lower cost wise has more products in terms of driving incremental revenue from its existing users i don't i guess i'm not too concerned with remitly remitly has certainly carved out a good niche with that demographic that you

Starting point is 01:00:24 discussed but i'd probably be more concerned with revolut that they seem like more of the formidable competitor but they're private so it's hard to get a whole lot of numbers on them i believe they said they had nine million active customers um so a little larger than wise and remotely but once again it depends on the definition if you do annual active customers wise is probably closer to revolute's figure so um i don't know i'm not really that worried about competition it's something where it seems like it would be hard to replicate the network of bank accounts in different countries and partnerships with different banks and you already have it here with wise and it's not like they are mortgaging their moat where they

Starting point is 01:01:17 raise prices the way paypal did on transactions so that you can no longer that it invites competition. I mean, if I'm looking at this, I think one, I got to set up the network and then I got to try to be a lower cost provider than Wise, which is already pretty tough considering that they're 10 times cheaper than the banking network. So I'm not too worried about competition. What would really concern me is if we started to see the take rate rise. If we started to see Wise's transfer take rate, keep in mind they can earn revenue in different ways that maybe makes the take rate look higher. But if the take rate on transfers starts to climb up, or maybe they stop reporting it, I would be concerned that they're maybe going the way of PayPal and taking advantage

Starting point is 01:02:06 of their customers in a way, but that just really doesn't seem to be the case here. Yeah. It is interesting where you can look at them having this network effect, but also potentially the economies of scale where the moat the competitive advantage can widen as they scale and are able to reduce the cost which you know there's classic examples of this out there you can think of the retailers like costco or walmart that drive stuff like this amazon as well obviously this is a an entirely different industry but that sort of thing can i think be quite attractive where the moat comes from us continually trying to reduce costs and be efficient in that manner,

Starting point is 01:02:46 I would almost want to see them maybe not even expand margins that much because that is where you get opened up from another digital competitor who can come in there. I would not even spending on marketing, but giving back to your customers because then you just create a much loyal customer base. That's one thing I'd maybe be concerned about

Starting point is 01:03:07 is pricing and the margin expansion. I guess they're still the lowest cost provider, but if they can go at higher margins, it's a little bit, I would say, not confusing, but it's a little bit conflicting when you're saying you're the low cost provider and having these high margins when someone like Costco always has the low margins. If you kind of get what I mean. I know, again, I use Costco as a comparative there. It's not the same industry, but yeah. The issue is that they can maybe pass it through in the form of lower costs, but the other way that they would have to do it is they'd have to just hire to keep merchants low or spend a ton on marketing. I'd be fine with them spending a ton on marketing, getting the word out there more and more, but they almost don't need to. I mean, they haven't been.

Starting point is 01:03:58 I guess like Adyen is still a low cost provider for their niche or somewhat maybe low cost or also just the highest value. And they have those really, really strong margins at 50% of that net revenue. So maybe it's not these apples to apples comparing it to the retailers. It's just something that came to mind. I know this is one that would be tough to answer, but maybe you mentioned the government stuff. any sort of international transfers from you know the federal reserve talking hyping up stuff with all their digital coins and all that stuff uh any any concern there that that could be a disruptive event for them if the governments get their act together but i guess maybe betting

Starting point is 01:04:42 on that is you know you could say that every year for the last 15 years yeah it seems unlikely just because for a lot of the governments uh especially ones where they have like a nationalized service this is kind of a cash cow is trying to go transfers through them so it seems unlikely that they would come up with a frictionless free service and in general betting on the government to come up with a great software product that serves customers really well and is easy to use and is low-cost has probably been a bad bet historically

Starting point is 01:05:18 and I'm guessing would continue to do so. Right. Some governments maybe disintermediating them in some way is a risk. They rely on a lot of

Starting point is 01:05:32 partners throughout the world but I would say that's also like an advantage as well because it's that much

Starting point is 01:05:41 more of a pain point for the next startup to try to build those partnerships right and yeah i guess kind of thinking through it they are a what i know this term is used over and over but a non-zero-sum player where they're making their customers happy with lower fees they're making the governments happy because they're part of you know they're they're giving money to them uh as you mentioned and also they're keeping their

Starting point is 01:06:08 citizens happy because they're not just giving i know i would be frustrated if i was a government And I was like, look, we got these people traveling to Europe and the United States and they're just having these European banks and United States banks taking three to five percent off of all their money for no reason that I mean, I would be like, let's change that. And why it seems to be helping them out in that regard. And they offer these high interest rates. They're also helpful to Visa and MasterCard because they're attaching more, hopefully more cards to the network. Seems like seems like a win win win scenario. Yeah, it is kind of a scale economy shared type business, that whole Nixley principle where they've got a cost advantage. They are passing it through to customers. Customers are bringing

Starting point is 01:06:55 more volume, which can further feed their cost advantage, which that's a great self-reinforcing cycle to have. That's not a bad place to be. All right, let's close things out, Ryan, as we do these stock research episodes. Are you buying shares today, putting it on the watch list, disregarding it what are your final thoughts on wise and i will give a i guess i forgot to talk about this on the portillo's episode we should talk about in all these when we say we're either like not gonna buy it or buy it or whatever we always wait probably like a week before actually buying shares we never want to do anything even if it's a really large company where we're buying right before we put out an episode that just doesn't feel ethical to us yeah i think the

Starting point is 01:07:37 chances of me moving this stock are probably pretty low uh so we'll play it safe we play it safe anyways yeah i this report i guess finally put me over the edge i had an idea that i wanted to buy this because i was so wowed with the customer experience and i use it so much in my own personal life that it was up there on the watch list for me and now i feel confident enough to put some money in it. Now, like you said, I'm going to wait, I don't know how long just for the purpose of being ethical, but there really are just so many things going for them. Their network is a real advantage that should continue to drive growth in accounts. The more functionality that they provide to customers, the more likely they are to keep money in their wise accounts.

Starting point is 01:08:24 And that means more revenue for wise. So I like that. And it's really not that costly of a business to grow like if you think about it from management's perspective yeah it's pretty asset light i could see this being a real a really profitable business in the future and quite the cash flowing machine now my the only bummer is that they report the way european companies do which is irregular and frustrating yeah and they do have uh i assume they're on the london exchange but they do have a us adr correct yeah it's yeah i can't remember what it is it's fairly liquid i was looking at it today um just fair warning for people make sure yeah make sure you're researching the one that's the best for you and whatever country you are in all right i think that's a

Starting point is 01:09:11 good way to close it out is a nice example of when you can find the combination of anecdotal evidence with a stock but also the combination of the data backing up and when you have those two together, I think it can lead to some promising opportunities, obviously, when valuation checks out as well. I think that's going to do it. Let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for tuning in, and we'll see you next time.

Starting point is 01:09:52 Thanks for watching!

Chit Chat Stocks - Why Ryan Is Buying This European Fintech Disruptor (WISE Stock Report)

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