Talking Stocks: Is Wirecard AG a Buy?
Updated: Feb 3, 2020
In a world dominated by PayPal, Venmo, Google Pay, and Apple Wallet, other payment processors tend to be significantly overlooked in terms of consumer knowledgeability and brand image. However, when you examine the largest payment providers in specific regions – such as Europe – you may find that the aforementioned players are not as popular as you initially thought.
When it comes to European countries – especially the likes of Germany, Holland, Spain, and Czech – there’s a company that’s been insurmountably collecting the market share over the past few years, and therefore completely overtaking other payment processors in terms of revenues and consumer preferences.
Introducing, Wirecard AG.
Despite its many merits, this company has sustained its fair share of controversy and ethical questionability, which is why we aim to analyze its core competencies and deduce whether its fundamentals will allow for far greater growth in the near future, given the recent backlashes.
1. Financial Fundamentals
In terms of the quantitative aspects, Wirecard ranks extremely well when holistically analyzed on its own and through competitors. Consider the company’s position in the “Holy Trinity” below:
a) Income Statement
In the last 4 quarters
As depicted above, Wirecard’s key financial measurables (Revenue and Profit) have both increased substantially in the last 4 quarters. This occurs as a result of penetrating new markets along with signed deals that collaborate with existing local providers. For example, Wirecard have recently launched a service with Orange Bank in France, which optimized the local banks’ services by licensing Wirecard’s software and implementing it into OB’s mobile app: thus creating more effective payment options. This expands Wirecard’s reach in terms of consumer base, and therefore translates to millions of euros in augmented revenues.
b) Balance Sheet
Alongside the income statement, the figure above depicts Wirecard’s favorability in terms of assets and liabilities. Most significantly, the company attains a current ratio of 1.75, which means that they hold $1.75 in assets for every $1 of liabilities: thus articulating their financial strength in this aspect.
Additionally, their asset value is 2.8 times their debt, which shows that they hold enough liquidity to satisfy their creditors and bankroll their short-term liabilities: both of which provide positive connotations of their finances to investors.
c) Cash Flow Statement
Although not exactly a traditional Cash Flow Statement above, the latter 3 metrics clearly establish a strong link within the fundamentals of Wirecard. With free cash flow increasing over 73% in a year, the company’s liquidity and their ability to retain operations (i.e. management's competency) is essentially unquestionable: both of which – alongside the other indicators – articulate the reliability of Wirecard as an investment.
2. Performance vs Average Market Statistics
Despite the company’s rocky several months, its figures still hold up more favorably than the average market results. Consider the following comparisons in terms of net profit (to prove current sustainability), 5-year sales growth (to prove track record), and 5-year Earnings Per Share growth (to prove shareholder value).
Figure 1: Statistical Comparison
As depicted above, Wirecard AG significantly beat the market in all three perspectives, which clearly substantiates the fact that the business is profitable, holds sustainable growth levels and simultaneously produces increasing levels of earnings per share over time. In terms of the latter, this is especially desirable as most companies in the fintech market tend to attain poor EPS levels: which directly puts Wirecard and its shareholders in the front seat when it comes to financial dominance.
Key Point: Whilst financial dominance is evidenced here, there are reasons to speculate on its reliability. This is because Wirecard has been investigated twice for accounting fraud, to such an extent that their Singapore offices were raided back in February 2019. As a result of a Financial Times report, the company’s reputation was damaged for a short period of time, and led to the stock price losing over 35% during the last few months.
Whilst the investing community is positive that Wirecard will overcome these setbacks, it’s considerably possible that this investigation will further continue in the near future. If this occurs, we may not see the potential growth that we aim for, and should therefore exercise caution with the timing of our investments.
3. Fundamental Valuation
Based on the present valuation of Wirecard’s future cash flows, it is apparent that their shares are undervalued by over 50%. What does this mean, in layman’s terms?
Figure 2: Fair Value of Shares
a) The potential for growth is extremely plausible.
Being undervalued suggests that the shares of Wirecard are far more likely to see growth than downfall, because they haven’t actually reached their “real potential”, so to speak. Betting on companies that are far placed from their fundamental prices – such as the example above – is known as value investing: and this is what created the immense wealth of investors such as Buffet, Seth Klarman, and Ray Dalio.
b) Ability to buy more shares at a cheaper price.
Given the fact that Wirecard’s shares are priced at approximately half of their fair value at the moment, this means that you can buy twice as many shares with any given amount of money: and with twice the number of shares comes twice the potential return.
In an even more extreme case, it is possible to see 4-digit returns when purchasing companies under their fair value. Consider the fact that in 2008, Citigroup’s share price dropped to $0.97, whereas their fair value was around $45 at the time. Once the crisis was averted, investors who bought Citi at the aforementioned price and then sold it at the fair value would’ve made a 4,872% profit: and this is just one example of the potential rewards of investing in undervalued companies.
Summary + Overall Sentiment:
The 3 financial statements of Wirecard depict reliable financial strength, as well as evidence of growth and substantial future potential.
Against the market of payment processors, Wirecard outperforms in all of the 3 key metrics: once more depicting proof that the company is not only impressive on its own, but is so with regard to competition as well.
Diligent investments into undervalued businesses are the one-way ticket to triple, or even quadruple, returns: and this is precisely why Wirecard’s 50% discount on fair value is a critical opportunity to further explore for potential investors.
Fundamentally, this company strongly ticks all the boxes that one would consider before an investment, and given the fact that it's trading at such a large discount, it's plausible that one could see highly impressive returns here. However, considering the controversy as well as the fact that the market is extremely expensive at the moment, investors will perhaps be better off waiting until a correction to pursue this equity.
While 2020 is largely forecasted to be another great year for stocks, 2019 has taught us that the market continuously defies logic and theory, which is why profit-seekers should keep a keen eye on signs of a market meltdown.