What I like (and don't) about Wise (LON:WISE)

And why shareholders are in the peculiar position of hoping they can't trust the CEO

The following content is for general information purposes only and is not advice. I do not own shares in Wise (LON:WISE) and will not trade in the stock for at least two trading days following the publication of this article. Please see the about page for my disclosure policy.

I have previously owned cross-border money transfer business Wise twice. I first purchased shares for an average price of £5.53 in early 2023. I held these for about a year before selling for £8.32, representing a 50% gain. I then repurchased the stock for just under £8 about a month later and ended up selling for an 18% loss after holding for just three weeks. We are now approaching a year since my final sale and Wise shares are priced at just under £11, 68% above my final sale price.

When I sold Wise for the second time, the reason was because I thought interest rates were going to fall and this would impact the company’s profitability since it earns interest on customer balances. Interest rates have started to come down, but profit hasn’t. That my prediction about profitability was wrong was not my primary mistake. My main error was in trying to trade short-term swings in the share price, rather than focusing on the longterm value of Wise’s business.

I think Wise might be one of the best businesses listed in London. I was intending to write an in depth piece explaining this view, but having drafted about 1,500 words I decided to stop. This is because I stumbled across the following podcast episode, which aligns with (and expands upon) my own research and does a superb job of explaining Wise’s business. I thought it would be a waste of time to rehash similar arguments here.

The key insight (for those who don’t have time to watch the above right now) is that Wise employs a “scale advantages shared” business model. This means that as Wise grows, its cost to serve falls and it shares the savings with customers which in turn drives further growth. Incumbents (typically banks) cannot effectively respond to Wise’s low cost and rapid offering due to their reliance on the inefficient correspondent banking system.

Although incumbents are hamstrung, the cross-border money transfer market is attracting some formidable entities due to its vast size. These include Visa and, Facebook and Instagram parent, Meta.

Another risk is posed by the potential introduction of central bank digital currencies (CBDCs) and increased digital connectivity between and within domestic payment systems more generally.

While these threats need monitoring, they remain in the distant future and in the meantime Wise’s position is growing increasingly defensible. Furthermore, the market is large enough that I suspect Wise will be able to flourish even as competition sharpens.

In the past, Wise’s management has articulated its “Mission Zero” whereby the intention is to ultimately make money transfers free for customers. It is hard to imagine how Wise’s shares would deliver high returns under such a scenario, but perhaps other products such as the Wise Account would compensate for lost earnings.

Even though “Mission Zero” is a long way from completion, management is targeting a reduced underlying profit before tax (PBT) margin of 13% to 16% in the medium term (versus 20% in FY 2025).

This margin is based on “underlying income”, which is defined as revenue plus 1% of annual interest income on customer balances. Currently, Wise earns much more than 1% on its customer’s money because it is not a bank which inhibits its ability to pay interest, although plans are in place to address this.

If I take management at their word regarding retaining only 1% of interest on customer balances and model future underlying income out to FY 2030, I get the following:

The historical data in the above chart is taken entirely from Wise quarterly reports with the exception of the period prior to Q4 2023. This is because quarterly underlying interest income data for the period prior to Q4 2023 has not been publicly shared by the company (at least, I couldn’t find any disclosures).

Therefore, I estimated underlying interest income from Q2 FY2022 to Q3 FY2023 based on 0.25% of the average opening and closing quarterly customer balance. I could not find quarterly customer balance data for the period prior to Q2 FY2022 and so did not include any underlying interest income before then. In any case, customer balances were relatively small at this time.

The forecast data above is generated by simply linearly extrapolating the historical data.

For FY 2030, I get total underlying income of £2.6 billion, of which between £335.6 million and £413 million drops through to underlying PBT based on Wise’s 13% to 16% target range.

Wise has a market capitalisation of about £11 billion at the time of writing which is 27 to 33 times my estimated range of PBT in FY 2030. This seems expensive, unless Wise continues its shareholder friendly habit of excessively outperforming management’s targets. I note that Stockopedia has £378 million profit after tax pencilled for FY 2026, which is based on 16 broker forecasts and is significantly ahead of my FY 2030 PBT figure.

CEO and founder, Kristo Käärmann, holds 49.3% of the voting rights of Wise despite a lower ownership shares due to its dual class share structure. Although this is just short of a 50% controlling stake, he retains enormous influence over the company. If he says that profit margins are going to moderate in the future then I am inclined to believe him.

I would happily become a Wise shareholder again based on my understanding of the business. However, the shares would have to be trading at a more compelling valuation than they are currently for that to happen.