Chit Chat Stocks - Wise (WISE) | Not So Deep Dive

Episode Date: December 7, 2021

Wise is a London-based financial technology firm. The company aims to create money without borders. Users of wise can send, spend, and receive money on Wise. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Wise. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:57) Industry | (8:52) Management & Ownership | (11:43) Valuation | (14:29) Earnings | (16:22) Balance Sheet | (18:37) Our Analysis | (20:35) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. I think we should start describing what the show is to give people's expectations and for any new listeners,

because I always forget to do that. This is the show where we go about 30 to 45 minutes, probably closer to 45 minutes, trying to go over the basics of an individual company. We're going to have Ryan start out with the history and the background of what the business does. Ian and I are going to hit valuation, balance sheets, management and ownership, industry. And then we're going to talk more about our opinions on the company. So hopefully get the basics. Typically, when we do one of these, this is the first time we're actually reading about

the company or maybe one of the first or second times. So we're not an expert on the company right now, but we're going to hopefully learn along with people. So if you're an expert on the company we talk about, please, we may get some things wrong. We're just trying to learn with you. And today, the company we're talking about is Wise. Ryan, you have something to add? I'll also mention, the goal of this is to turn over rocks. It's to look at businesses, see whether or not you want to dig a little bit deeper. It does not imply that we're going to be

super bullish on the company. We may be, and it might be sort of the initial research process for a company we end up liking down the road, but it's not a pitch. Exactly. Exactly. We save that for the Thursday episodes. Some of those are more pitch-like, if you like that style. We try to mix it up with both those once a week. But we have Ian Gray on the show as always on every other Tuesday. Ian, we're talking wise today. Have you ever researched this company before or heard of it? I'd heard of it before and passing kind of is looking into some financial technology companies, but never had dug deep or done any sort of research on it. All right. And they IPO'd or actually no, they did direct listing. They're

one of those companies this summer. So we have a couple, we have an annual report, the prospectus, and then they recently on November 30th, just released their first half results. They're a English company, or I guess United Kingdom. So they're going to have some different, and we had to convert from the pound and they don't have the typical SEC type results that are all boilerplate that we're used to in the United States. And we're going to get into that. But first let's talk about our presenting sponsor on the Tuesday episode of Potential multibaggers. The aim of the potential multibaggers service is to find stocks that can go up 10x over the next 10 years or compound at 26% per year. They pick high growth stocks to hold them for

a long period of time. That's more of a decade plus time horizon. Of course, they have to continue performing to hold them. And Chris, the man behind potential multibaggers calls this his quote, buy and verify. And that's just to highlight that this is a service that is not picking stocks, trying to get your subscription money, and then go away. He's working along with you, with this team, talking about all the picks, saying, all right, maybe this one we're going to take out. Maybe this one is a great time to buy right now. And their track record is fantastic. They're above their benchmark of 26%. And they hopefully are trying to do that over a decade. But so far, I think for four or five years now, it's north of 26%, which is quite impressive.

So if you want to become a multi, you can go to Seeking Alpha and look for From Growth to Value, Google it, or go to at From Value on Twitter. If you need any help with that, please message us. We can help you get in touch. All right, Ryan, you want to talk about 7investing and introduce WISE? Yeah, right before we get into WISE, 7investing, we have a special holiday promo code out. It's chitchat. You get $50 off the annual subscription.

So if you're thinking about getting it for 2021, thinking about renewing, go ahead, use our code. We love our partners over at 7investing. And they actually just dropped recent picks the day we're recording this. So I haven't read them yet. So I kind of look forward to that. But yeah, go ahead and check it out. And if you're younger and you like Discord, I'm sure some people do. They have a community over there. So that's kind of where you like to communicate with people. It's perfect for their subscribers. That's where they love to communicate with people, talk, help you learn about investing. All right, let's get into Wise. So Wise's mission is they say, 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. And they give a lot of context about why they exist throughout all their documents. So I'm going to kind of spend some time on that. So historically, the banking industry, I guess this is kind of how currency transfers have gone previously. So the banking industry would send money through a complex system of corresponded banks and it would actually send the money. And so since they're sending that money, there were fees pretty much along all the way with transactions that were constantly added. And it took a lot of time to execute those transactions. And so additionally, or some banks eventually evolved to saying that they don't have any fees and they ended up applying what you'll see is wise as current business model.

but they would mark up their own currency exchange rate. So there wouldn't be an actual transaction fee, but then they do a markup on the exchange rate. So they'd make margin that way. And they weren't very transparent about it. And so 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 US dollar to pounds, you pay in your US dollar to Wise's US account, then Wise's UK account sends pounds to the recipient. The money is never actually sent anywhere though. So that's kind of the important part. And they show users the exchange rate and transaction fees beforehand. So there is total transparency there and they

give you basically what your fee is going to be. So that's something that I think a lot of users enjoy. And they are one of the cheapest solutions other than MoneyGram. It's eight times cheaper than traditional banks, six times cheaper than PayPal. And I think MoneyGram is basically, it's only cheaper for small transactions. I believe Wise is the cheapest for large transactions. Yeah, it depends on what. And MoneyGram, if anyone doesn't know, is a legacy provider that's trying to transition, sort of compete with Wise. But as we'll get into later, Wise and MoneyGram and other Western Union type customers are really different target markets here. Yeah. And so there's actually a really interesting history to the company. So in 2011,

Tevett Henrikus, I might be saying that wrong, and Christo Karman started Wise. Initially, the idea was meant to just simply solve a pain point for both of them that they were facing. And it actually ended up totally evolving into the business that it is today. But so both Christo and Tevett were from Estonia and they worked in London. Tevett worked for Skype and Christo worked for Deloitte, but despite both them working in London, Tevet got paid in euros while Christo was paid in pounds. However, Christo had a mortgage in Estonia, so he had to pay that and in order to pay it, he would have to convert it to euros or at the time it was like Estonian croon, but let's just use euros for this example. And the process took a lot of fees and banks took

a hefty chunk on it. So it was really hard for Christo to basically pay it. And he was obviously losing a lot of money in the process. So they decided to find a workaround. Every month, Tevet would put his euros, which was, like I said, Estonian kron, into Christo's Estonian bank account. And in exchange, Christo would replace the amount in Tevet's UK account with the appropriate amount of pounds. So they were basically just having their own separate accounts and doing it for each other. And 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. So that is still the core technology or the core idea. But since then, it has evolved

into a more complete international account with additional features, which we'll talk about. And they went public via a direct listing in July, which I said is a green flag because we are a direct listing podcast. We prefer that over IPOs and SPACs. Yeah. I guess, yeah. Direct listing, it's not perfect, but it's probably better than IPOs and SPACs most of the time, especially for a company that's profitable. Likewise, that doesn't really need to raise the money. But I'll go into the industry landscape and competition. This is the same industry as Remidley, which is a show we just did the other week. I'd listen to that one for more of an overview on this industry too. And you'll want to listen to the interview we did

with Luis Sanchez back in August. I think it was August, maybe September on MoneyGram. So you can get a good overview of all the businesses that are competing here. $24 trillion in cross-border payment volume is gone or sent each year. It's not gone, sent each year across the globe. So that's a huge quote, you know, Tam here, but given Wise's low cost option, which their take rate is down to last quarter or the first half of this year for their fiscal year, I believe it was 0.62%. So really off of that, there's likely no more than $100 billion opportunity here, which is still high, but not $24 trillion. However, in the letter to shareholders, I think it was either the recent blog post or the one around the direct listing,

the founder that is also the CEO now said that eventually they want to make cross-border payments free. So eventually the business model is going to change. I don't really know what it's going to be, but that's what they said. Actually, a funny note on the conference call, I was reading the transcript. They were talking about the fee compression because analysts probably, they asked like three questions on that. The analyst has got to be the thing they ask every time. And he said, well, what do you think the floor on this is? And then the guy, the founder goes one word, he just goes zero. And then it's like, all right, next question. Let's move on. But yeah, That's all I have for that competitors remotely zoom, uh, not zoom video, but zoom spelled X O O M.

And that's also a part of PayPal. So PayPal is a competitor. They don't like PayPal. They really like to hate on them. Uh, especially in all, almost every conference call they do. I don't like PayPal either. We actually, anecdotally, we were going to use PayPal. Uh, I guess that relate to the advertiser we have, uh, Chris is not in the United States. Uh, so we were like, we're going to send money. We actually use Wise. It's the best solution we could find. And it was the cheapest. So PayPal sucked. It was a pain, pain in the butt to set up an account. Maybe I'm just not good at technology. Or I mean, either way, Wise was a lot easier, which I think was a nice positive. And that's kind of something how we found the company in the first place.

Western Union is also a competitor. Revolut is one that we found out about that's more crypto based. I don't know much about them, but they're a competitor to watch out for as well. And then And compared to Remitly, if you're kind of confused, because Remitly is the other digital upstart that's trying to take over the industry, you know what MoneyGram and Western Union are kind of, but Wise seems to lean more wealthy people and then more European. So that's the difference. But they're going after similar markets, and they also have some similar growth paths, which I'm sure we're going to talk about in future growth opportunities.

But Ian, you want to talk management and ownership more? Yep. So Crystal Carman is the co-founder and CEO, and he owns about 19% of the company. As Ryan was mentioning, he did work in consulting prior to founding Wise. And so that's his background. Tavet Henricus is the other co-founder and executive chairman. I'm not sure if I said that name right, actually, but he's the executive chairman. And prior to Wise, he was Skype's director of strategy.

And according to one source I found, he was actually their first ever employee at Skype. And so I think that was fairly lucrative for him. And so now he's become a little bit of an angel investor and done some other things as well. And he owns about 9% of the company. So between the two of them, they own somewhere in the neighborhood of 28% of the company. So very high insider ownership with two major insiders. I know for some people, that's a big positive. For some people, they're a little bit worried about that. They also have a dual share class structure. And so from what I was reading, and I didn't dive into this enough, actually, but from what I was reading, it's temporary. And so initially, they can maintain control of the company, but that over years, those share classes phase out. That's something to do a little more research on. Just forgot to take another look at that, actually. But then, go ahead, Brian. I was going to mention that I do think I saw a lockup period.

I may have interrupted you there, but I thought there was a lockup period on it. I'm not sure. I'm not sure. We're basically past that. So either way, I don't think it's relevant anymore. Is it? Yeah. We're pretty close.

It was this summer, so it's about to be here. I wouldn't worry about it too much longer. It's not like it just happened. Yeah. From what I was reading, there wasn't a lockup period and that these direct listings tend not to, but, um, it's, it's something I would be something to double check on because what I was going to mention is whether it has a lockup period or not, as of the last filing, which was in September, September 1st. So quite a while ago, VC ownership was still about 26%. Um,

and recent Horowitz owns about 9%. And those, the, the VC money tends to sell out. They don't generally hold onto these companies long-term. So, um, you should be aware of that. If you're owning that there could be some downward pressure on the stock as some of the VCs lock in their returns. Definitely. Yeah. The VC ownership is the most important one to look out for there. And overall though, management, I'm sure we'll talk about this later. I mean, very, very impressed. I don't know. They seem frank. They're not like Peloton's founder who seems to have the audacious things that may not make sense sometimes. Some other founders have that as well. I don't know, just very impressive. Maybe it's because of the European ones. They're always way more impressive

because the U.S. ones seem just to be crazy and have no discipline, but I'll move into valuation. Market cap is about $9.85 billion. This is all going to be in U.S. dollars transferred over just using the current rates. So make sure to do that yourself. They're really reporting in pounds. So just do those transfers on your own. Ticker is WISE, W-I-S-E. I'm going to give a couple different price to sales here. Price to sales is 14.4. If you annualize first half 2022 numbers and their fiscal year starts in April. So we're about to close out their third quarter, but they just reported first half numbers, which ended in September. So I think that number gives about the current price to sales multiple, although they may have some seasonality. So

again, I would look at some trailing 12 month stuff if you can, but right now it's really hard to do that because they don't have quarterly reports and they only have two filings out. But price to sales is about 17.5 based on their full year 2021 numbers. And that ended in March of this year. Again, that's a bit far back and they don't give out any forward guidance except for kind of a range for revenue growth. So it's still expensive. And then price to gross profit is about 28 based on fiscal year 2021 numbers, but that should come down rather quickly as we get the full year report next, probably late spring, early summer. And yeah, so the price goes probably 28, seems high, but it's not as high probably as it actually is

right now because that's based on something that's nine months old. And then if you look at their share count, they have about a billion shares outstanding. So their actual price is pretty low. I think it's below 10, and they have about 30 million shares that they just allocated for employee stock options. So there's going to be some dilution. That's part of how I'd do it. It didn't look like it was crazy amounts. There's no Palantir type levels of double digit dilution, but I would assume it's looking at the numbers. It's hard to tell, but it seems maybe about one to 3% dilution coming. All right, Ryan, do you want to hit earnings? Yeah. And as we've alluded to, they just reported their results for the first half of the year on

November 30th. So quite recent. And in the second quarter, they reported 3.9 million total customers that completed at least one transaction. That's how they measure it. And that's up 23% year over year. 95% of those customers are individuals versus 5% that are businesses. And then the transaction volume per customer grew by 10% in the second quarter as well

on an annual basis. And then they had, I said 290 million in revenue for the first half, but that was euros. And I didn't realize that there were- You mean pounds? Well, I initially converted it to euros and not pounds. So I did it again.

They did about $340 million US dollars in the first half revenue. That's up 33% year over year. And then the gross margin was 68%. That's up from 62% the year prior. They had $69 million in adjusted EBITDA. And I believe I may have just taken the pounds number. Let me double check really quick. Yeah. No, sorry. They're probably doing about... You know what? I'm going to do a generalization here. I think they're probably doing about 75 million US dollars in adjusted EBITDA. Either way, the percentages shake out to be about 25%, I think, adjusted EBITDA margins. They actually convert a lot of their adjusted EBITDA to free cash flow. So free cash flow margins were 23%. Also something that they highlighted that I thought was interesting

was that they were able to reduce their average transaction prices for customers by seven basis points. And raised gross margin, which that was a nice sign to see. Yeah. Yeah. That was interesting. They went from 0.69% on an average transaction fee to 0.62%. So that's an effort that they're really trying to talk about is trying to lower that transaction fees and really make it as frictionless as possible. Yeah. And just to confirm on those conversions, did you have 340 million usd for first half of the year uh revenue for revenue 350 340 340 yeah 340 okay all right that's that's correct then i just did the to check it all right so i think the numbers are good um all right ian do you want to hit balance sheet yep so these balance sheet numbers

are in british pounds so but so they're a little bit higher in us dollars but they've got over $4 billion in cash or 4 billion British pounds in cash, about 100 million British pounds in debt. So a very significant net cash position, almost like 3.9 billion basically in net cash. So very well capitalized. They don't have the same balance sheet items as Remitly. And if you remember that episode, we talked a little bit about some funds in transit type accounts that Remitly has. And now I'm kind of curious, it's due to one of two things, either different regulations under IFRS, where they just report different line items, which I see occasionally, or there may be something different about the way that Wise transfers money than Remitly does, the way that they're holding it. So, um, that's something to, to maybe take a look at, but it shouldn't be a, there's no red flags on this balance sheet, at least from my perspective, they've got a lot of

cash, little debt and, um, should have plenty of, plenty of runway to keep growing the business. Yeah. I think they don't break it out, but in the footnotes, it does break out. I believe it, uh, they'd probably do it a different way. Uh, but I do believe they have a lot of this cash that is, uh, like not necessarily theirs. It's kind of like, you know what I mean, like a restricted crash due to customers or stuff like that. But that does highlight the advantages of scale for these type of businesses because you have to hold the currencies. You have to have a certain, I guess, for lack of a better word, a liquidity position in all the currencies to make sure all the regulatory stuff gets hit.

And it allows you to move money faster. And it allows you to move money faster. So that type of cash position, it's not necessarily going to be available to shareholders, I would think, but it is something to watch out for to see kind of what their financial strength is. Sort of like a bank, but a little bit different. All right, let's hit the ad break. favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com cox panoramic wi-fi includes advanced

security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in we're going to hit anecdotal evidence next but ryan you have to clarify something that we checked yeah we did check this during the break. There is a lockup and I believe the 180 days will, it might come right on the day that you're listening, actually. I think it's right around then. So if you're

interested in the stock, maybe just wait a few weeks just to see how it plays out. And for those people that don't know what a lockup is, I guess we should maybe explain that. It's just insiders are able to sell after that expiration date. And so sometimes that can unlock a large supply of shares. And you can see, I'd say on average, you can see prices decline after that lockup, but it really varies. So maybe just wait a little bit if you're interested. Yeah. Yeah. That sounds good. All right. Anecdotal evidence. Ian, what are your thoughts here? Got anything? Don't really have any anecdotal evidence with Wise.

All right. Ryan? Yeah, I guess I have two. First of all, I made an individual account this morning just to see how easy it was to sign up and it was very intuitive um it was really really easy um and then the other anecdotal evidence i have we alluded to earlier in the show which is one of our sponsors pays us using them um and i think it was because it was the cheapest solution and well we were trying to do paypal first but you know i we did we did say let's let's let's try wise i heard about them you know and the fees are low so it's great yeah that was a pretty seamless enjoyable experience so anecdotal evidence positive yep and uh app seems good to me i have it i think i'm

gonna try out the debit card they usually send those for free so i think you have to pay for it oh you do like nine bucks yeah nine bucks i think so that's easy uh well okay nine bucks i'm out but uh i wonder what the fees on the debit card are because they say it's low but you never know Like, you know, most debit cards, the user doesn't have to pay anything, but I wonder if the users have to pay things, especially with these foreign currency type deals. But it seems like a great option. No one can really compete with that except Remitly maybe or any of the other people that have these remittance stuff set up. Yeah. Well, I mean, because like Cash App can't.

This makes sense if you're spending, I think the debit card makes a lot of sense if you're spending a lot of time in a different country. And so there's a good chunk of people that do. Yeah. So that seems like a good solution. And they've already gotten a lot of signups, which I think you're about to mention. They've issued a lot of debit cards. Yeah. I'll talk about it more in the future growth opportunities. I wanted to make sure to have the numbers around all that. But yeah, let's move to future growth opportunities. Ian, what do you got? If I'm going to touch on wise business, so they market this on their site as quote, the only business account you need to go global, uh, close quote. And they kind of, they say, Hey, we've got lower fees. You don't need to open bank accounts in multiple countries. You just have to have our account and we'll be able to, we'll help you with low fees, transfer money around,

get the right currencies that you need and make sure everyone has, uh, basically the right currency in the business. And it looks like they're trying to add some ancillary services to that as well. They're talking about how they're allowing companies to invoice and receive payments very quickly. And they say that 50% of payments arrive in less than one hour. This line of business seems particularly well-suited towards software businesses and startups. And I think it's probably becoming increasingly important for startups and really any business in the world to be able to have a global payment system where you can accept money and deal in multiple currencies in multiple countries and wise business seems to be a great

way to do that. Yeah. The rise of Fiverr, I think could be a benefit to this as well. You have people trying to do work remotely around the globe. I think that could be a huge tailwind for this. But Ryan, what do you got? For me, it's the API service. I mean, there are a few different um, uh, growth opportunities that I think are feasible as with any FinTech. There's obviously a lot of growth opportunities. Um, and Brett's going to touch on those, but I liked the API service. And we also talked about this with Remitly who had one as well. Almost the same thing, right? I think it's the same. Um, why I said that more than a dozen banks and enterprises already use this service. And so enterprises, I believe kind of gets either special treatment

for banks or they have a solution in-house. And it makes sense for them to kind of just sell this API, essentially, to enterprises, banks, stuff like that. And I like to think about it almost as a hedge. So it kind of eliminates the challenge of needing to replace the banks, but instead you can enable the banks, which doesn't seem to be as tall of a task for them. I am curious how it differs from Mitli's offering and sort of what options the banks or the enterprises have or who's paying like what's the cost kind of yeah because if they're sort of if

it's them and remitly that are sort of the only entrance to the market and there's a lot of enterprises that can adopt this api this could be a huge growth opportunity for them yeah if it's commoditized i really don't know so that's something i'd have to look at um yeah i tweeted something about wise and remitly before the show and people said that this sort of thing could become a commodity however if it's just two players i don't know how easy it is to copy and usually there are other legal hurdles too yeah there's illegal stuff that's why the banks don't do are well they have the banks can do it but they don't have the infrastructure it's all they have a bunch of tech debt they're often you want to say often domestic too yeah and

like usually if there's two players the market gets pretty rational it's hard to predict certain industries are different but i would you know i don't know like twilio has some competitors um that stuff's not not that hard to build but usually the comprehensive offering can really make it so you have some pricing power but who knows it's really early days on that one um i'll hit my future growth opportunity and that is just expanding the wise account which is their bank account like thing with the debit card and all the other stuff to more than just transfer fees because over time they said they want to bring transfer fees basically to zero um this is going to be like a bank like account you can hold through an app think of it very similarly as cash

app and or your bank account that you can get really is just through your app now you can hold money in 56 different currencies in the wise account app and then as of the ipo prospectus There are 1.6 million debit cards issued and $5.5 billion in U.S. dollars held in accounts. I think that's a pretty impressive number. I mean, 1.6 million debit card issued. I think there's a lot of chance. I don't know what type of fees they can earn. That's close to 50% of quarterly users.

Yeah. That's really impressive penetration rate with a debit card. Yeah. I mean, there's a lot of opportunity for the Wise account if it can make someone an international bank account. I mean, for example, I'm going to work remotely in 2022 for a bit, and I'm a heavy cash app user for basically just my spending and stuff like that. But I'm not able to use that internationally, so I'm going to have to use something like Wise Account or something else. So that kind of shows that regulatory barrier to entry on that, which, you know, they have a lot of room to run with that stuff. But let's move to highlights and lowlights.

Ian, what do you think here? the highlights for me start with just being clearly good for consumers. I always like businesses that it is very evident that this has made the world a better place for consumers and for transferring money around the globe. Wise has been just a very positive force in that. I think a couple other highlights for me, strong free cash flow margins at 23%, I think is what Ryan quoted. It's generating cash, right? It's a business that's good for consumers and generating in cash. And so that's exciting. And then also the strong balance sheet that I mentioned in that section. And just to clarify, um, I took another, another look at the balance sheet and, um, you

guys were correct that there is some, uh, they do break out some cash and transit accounts in some different places. And so after taking those into account, there's about, um, 4 billion pounds in, uh, total cash and cash equivalents. And they've got about, about 180 in cash and transit accounts. And so I'm still very, very strong. So like I said, almost 4 billion in cash that is theirs to use. So that should be very bullish for the company going forward. So a strong balance sheet, but some low lights for me, I think the large VC ownership is not a low light because that like in the sense that the business did something wrong, but it's a low light in the sense that there probably will be some downward pressure on this stock that there's just going to

be a reshuffling of who the shareholders are over the next six months to a year. And they're new to the public markets. And so it's kind of yet to be seen, as I think we've all talked about. The management team seems pretty good and solid. But once you become a public company, some of those things change. So it's something to watch for the next couple of months. All right, Ryan. Highlights for me, this is something I thought about a lot.

And it was kind of like the Google effect early on because people were like, how much ad dollars could they have? There isn't that much. And they got a premium valuation and people said like, there isn't that many ad dollars on newspaper now or whatever. And so I think right now they state that they account for approximately two and a half percent of global transfer volume. But I think the market will expand as fees decrease because people will know, they'll

be cognizant of the fact that it's not going to be intensive or expensive, sorry, to transfer money. And so I think they can kind of carve out industry growth on their own. So I think they can kind of expand the pie. And then also, I thought the 97% cash flow conversion was great. Lowlights for me, though, is that this is a network effect business, especially, I guess, on the individuals and on the business side, which can kind of be a double-edged sword. So like that example that we mentioned, where if I'm a business and I want to pay a supplier

through wise the other side needs a wise account um that is a good thing um that can be a good thing but at the same time it's hard to replace paypal because that's that's part of what makes paypal so sticky is it has to be an agreement between two sides fortunately uh wise is very intuitive to set up an account i think i did it in literally 10 seconds um and so there might be less friction there, but it might just be a little more resistance from the business side for wise when they try to enter that market or as they're entering it. Yeah. All right. I'll hit my highlights, management's candor and their goals that they outlined seem very nice. Just that North star of reducing fees and then expanding the

market just seems so easy to do and not really anyone else can compete with them right now, or very few, I should say. There's the regulatory barrier to entry. There's the high switching cost I think here. I don't think the network effect is there, but I think it's a little smaller than some of the other remittance companies because this is more of an international bank account for people. Although the network effect I think is still fairly strong. There's minimal competition. There's great unit economics. And then they're the number one name in their niche of this space. And there's only four or five total competitors. So in their wealthier niche, they're definitely the number one name. Lowlights, there's the crypto and central bank tail risk that

everyone likes to bring up. I don't know the likelihood of that, but we'll see. A good amount of shareholder dilution that should be coming. That's just going to be a headwind. And then there are the risks on currency fluctuations and political stuff that seems to be impossible to predict as a shareholder. So that's kind of the risk where you have a hard, you know, that stuff's unpredictable. It could happen. And if stuff like that happens, it'll definitely affect Wise. All right, let's move on to bull case, bear case. Ian, what do you think has to go right for Wise to be a good investment from here? I think if you're investing in Wise, the major bull case is that it's a bet on continued growth of international markets and a growing world

economy that's becoming more and more interconnected. I think, as I mentioned in the future growth opportunity, I think that the bull case for Wise is that it becomes essential for every business in the world to do cross-border transactions. And I think we're getting closer and closer to that every single day. And Wise seems like it's in prime position to take advantage of that. Yeah. It seems that there are a lot of tailwinds behind Wise. I think this idea that doing business internationally is pretty frictionless now. That's something that definitely benefits them. We're a good example of that. They're enabling it. Yeah. And so I think there's also just a lot of low hanging fruit within business accounts.

So if they can capture those and the network effect starts helping them, I could easily see this business growing its top line at double digits rates, and it already has good cashflow margins. I guess I'd like to see them get to a million businesses. I think that's about a 4X from here. It seems possible. Enterprises don't really tend to adopt this stuff, if I remember correctly, because a lot of it, I believe, is either in-house or special treatment. So it's really small and medium-sized businesses. But I think they can benefit the way PayPal has if they're able to get to sort of a critical mass of business users. yep and they can take advantage of paypal's need to keep fees high like wise has an advantage

versus them i you know i would be a little worried about um i don't know if i was a paypal i don't know how much of their business is competing with wise but it seems like if their fees are high that's going to compress over time and wise really has the advantage because they're already the lowest fees um my bold case is given that you know the gross margin got up to 68 you you probably see it go a little bit higher. Last report, they mostly have fixed operating expenses. I think the path to like 25%, 30% free cashflow margin or earnings margin seems very doable. They're already at 24%. I don't know if that's a one-time blip though. That hasn't happened before. At about $2 billion in sales, which is around 4X the size of here, maybe a bit

less if we're analyzing the first half numbers, that is about 600 million in free cashflow or earnings. So compared to a market cap close to $10 billion, that's not crazy, but it's not also that cheap. So really, if you want good returns here, I think you need to probably expect a 10x in revenue over the next decade. Now, you might say 10x in revenue, that's high, but if they can durably grow at 20%, 20, 30% for 10 years, which is a tall task, but that's how they'll do it. They're not going to be one that goes viral and starts growing at 100% just because of the regulatory stuff. They're not in nearly as many countries as they could be. There's just, this is not something, I don't know, am I getting this wrong, where this is not a business that can grow rapidly.

It's just going to have to be a durable grower. Yeah, because I think there's too many regulatory hurdles. Yeah, exactly. And people don't switch this type of stuff very quickly. Yes, it's kind of a big thing to switch over. All right. Bear case. What could go wrong here? I think the bear case for me is competition. And I'm going to talk about two sides of the same competition coin. So the first side would be radical innovation changes the nature of money flow and cross-border transactions

and cross-border transfers. And that there's just something new, whether it's crypto or some new innovation that we don't know that takes that core business down to zero. And I think there's already... The management team is expecting that to some extent. Um, but you know, I, and I think Ryan's going to get into that too. The other, the flip side of that coin is that if there's no innovation, I think competition could still be a problem that as the legacy players start to catch up and money gram and Western union, and even PayPal start to have more competitive offerings that wise is growth just slows because, um, they run into, uh, some, some, uh, there's other options on the

market and they're not clearly the best option anymore in this bear case scenario. And so if that were to happen, I think it hits some of those growth targets, and they're not able to grow at 20%, 30%, as you were describing, Brian. Yeah, that makes sense. Ryan, what do you got? Bare case for me is that there's this sort of race to zero transaction fees kind of across the industry, which… Well, I think management would say that's their bull case, because they're going to be the most competitively positioned there. Yeah, but if it happens faster than they expect, they might not have enough users and ways to generate revenue from those users, alternative ways to warrant the price currently. Because, I mean, if they go to zero transaction fees, which is the goal, that's awesome, that's great for society, they've got to get revenue somehow.

And I think they can. I think they can earn interest on account balances. I think debit card transactions is another way that'll be good for them. But is that enough to warrant the current valuation? It's kind of hard to say. If they get to a huge amount of users, then yeah, that makes sense. And that's why they're lowering the fees gradually as you're seeing. But if that happens faster and it's not them that are sort of the perpetrators of it, they're not the ones trying to lower the fees, but they're doing it because the industry has done it, then that's kind of a problem.

It feels a bit, and we talked about this on the Remitly, it feels a bit like stock commissions, like equity commissions in some sense, where you used to have, like Robinhood was the one that pushed to zero. Wise is Robinhood in this sense. Yeah, to some extent. And I think Wise has a better chance of getting revenue in alternative ways than Robinhood does. Well, that's true.

And if I could throw something out there, and this is probably a little bit controversial, but I would say that that did have ramifications. And I don't know that Robinhood was necessarily the big winner of it going to zero commissions that I think, you know, Schwab was very well positioned and even made the acquisition of TD Ameritrade. And Schwab was actually in a great position to capitalize on that. They weren't as reliant as some of the other online brokers because of the other ancillary products they had that they weren't as reliant on commissions. And so I wonder if something similar happens here, that there's some businesses that also have some ancillary, maybe it's PayPal, maybe whoever, that if this truly goes to zero, that someone else might be better positioned to take advantage of that than Wise. Yeah, that's interesting. it's hard it's different though because it's not like a choice it just costs a lot for a lot of companies to do this the banks can't really charge as much as wise or as little yeah i think yeah it

might not yeah it might not be a choice uh for most of these companies which is why wise wise is in great position it's kind of just the worst case scenario is that happens or slower adoption than i guess i'm thinking would occur but it seems so practical like the use case seems so practical next time i go to any other country and i need money like i'm just gonna get the wise debit card why would you use the bank stuff it's awful i tried to transfer money one time when i was in mexico and it was like i needed like 20 in cash and the charge was 20 bucks like i'm not paying a hundred percent transaction fees yeah i mean the bank stuff's awful two to five days i mean almost all of wise is instant now which is fantastic yeah all right well we're

talking bear case and this is turning into the bull case yeah i'll talk mine it's good sign i'll have uh the only one i have is valuation i think all the lowlights i presented we've been talking about are really low probability um they could happen that blockchain stuff stable coins But I read this and I look at the stuff about like the gas fees people have to pay on Ethereum. I may not have the terms correct there. That is so much higher than what Wise offers. And you kind of look at that and you're like, okay, well, what's the real threat there? Maybe there's some innovation.

There's a ton of money or not maybe money, but there's a ton of people going after that. you know, that could happen, but I think really the valuation is the big concern here. And to the people that are rolling their eyes right now, we've gotten a lot of slack for this lately is that we love the business. It's wonderful. We say a lot of good things about it. And then at the end we say like, it's, it's a premium valuation. One of our listeners, who is a really loyal, loyal listener, Max Massetti, he did work on this and he went through the time-weighted return of all the companies and the not so deep dives that we've done in 2021 he said the total portfolio of all those companies this isn't companies that we own

but it's companies we've looked at and we've in general said the valuation is high is down 13 year to date so being disciplined that is that is what we're trying to do yeah uh we're gonna yeah but with that said let's go to more or less interested ian what do you have i'd say i'm going to have a similar answer that i had last week with remitly that i'm less interested currently. But if we get another couple of quarters in, I want to see how some of the legacy players grow, particularly with MoneyGram and just see how this shakes out a little bit more. I could become more interested at some point, but I'd like to see this go on for another couple of quarters as a public company and really get more of a sense of how this market's going to

shake out. All right, Ryan. And I'll actually add one last thing too that I meant to say earlier that I think these free cash flow margins were one of my highlights. And I think those are really impressive. But as we start talking about durable growth, and 20 to 30% revenue growth over the next couple of years, that it doesn't happen all the time. But with a lot of these companies, those margins start to come down over time, because they have to get into other lower margin fields to continue to fuel that growth. And so that's something to watch with wise as well that some of these other ancillary services that they start to get into could have lower margin. And so even though they're growing revenue very high, it might bring down those free cash flow margins. And that

still could make for a good investment, but, um, I just want to see how it shakes out a little bit more over the next couple of quarters. Exactly. That's a good point. However, on the flip side, if they're able to grow while keeping that 25% free cashflow margin, that's the, I don't know. That's the jackpot on a company. Yeah. I'm more interested a hundred percent. I really, really liked the business. I like management. They are very candid. I think it might just be a European management thing. I always come away like wow you know what really like those guys well compared from the guys that are coming out of the valley at miami and the spax it's not a hard uh to compare to you might be a one foot

hurdle but uh and yeah i'm more interested it's going on the watch list for the time being i want to watch i'm probably going to read all the uh quarterly updates between remitly and wise first you're only going to get two a year for wise british company i kind of like that or european I think it's all European companies, but yeah. But yeah, more interested. All right. I am going to be more interested as well. I think Wise, this might sound strange, but Wise reminds me of Costco.

You might laugh at that, but the way they talk about how all they do is reduce fees, reduce costs, save costs for customers, and then basically earn whatever that same amount and then expand the pool of potential customers. This is stealing from Nick Sleep, the famous investor that everyone loves to talk about, but it is a classic scaled economy squared, I believe, for experts in that type of stuff. I think you may correct me if I'm wrong there, but I believe it is scaled economy squared if I'm just thinking about what those words mean. And that sets up for a fantastic moat over time where you're not only getting a moat

from, or you're not getting a moat from saying squeezing people on pricing power, you're getting a moat from one, having the low cost option versus the competition that people can't have, and two, making your customers happy, which is why Costco has one of the top moats in the world. I think Wise, while in an entirely different business, is going after a similar strategy that I think could play out really well. However, like I should say, valuation's hard to get around. I'm interested, but valuation's hard to get around. It's gone on the watch list. all right that's gonna do it for that episode uh stock for next week it's my turn i'm gonna choose twitter they had a new ceo come in so it's gonna be fun to reevaluate that business

changing of the guard changing the guard no jack at the helm so i think that was a lot of what was hanging up people well done well done paul singer well we'll see there's an internal hire so i don't now. But Jack, congratulations, getting 2% returns since the IPO. Fantastic. Sorry, that was rude. That was rude, but it's true. You should have been fired a long time ago. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.

We'll see you next time.