How patience paid off for this company's ever-growing earnings moat

Wise Plc (LON: WISE) is a stock the Forager International Shares Fund team has followed since its 2021 IPO.

The elegantly simple currency transfers app allows customers to easily move money between currencies for travel, transfers to family and friends and myriad other reasons, at a fraction of the cost relative to traditional banks. Some of the Forager investment team are proselytising users, so we believe Wise’s claims that 70% of the business’s rapid growth is coming from word of mouth recommendations.

The company is in the rare position of being able to drive its own positive feedback loop. By mercilessly reducing the costs of a transaction and passing those savings back to customers, it can continue growing user numbers for a long time. It’s a fact that management is intimately aware of. 

As CEO Kristo Kaarmann stated during the latest earnings call: “As the infrastructure gets more efficient, we invest in lower fees, wider moat, while remaining healthily profitable... We will invest in experiences that our customers want to talk about... bring more features to our customers in more places... expand geographically, and... deepen the experience. All of this is going to lead to more customers.”. It’s also one of the reasons why the market got this one wrong recently.

The company keeps cutting its already attractive exchange fees. In addition, it returns 80% of any interest earned above the first 1% to customers on the £15 billion (and growing) cash pile those customers have deposited at Wise. 

All this is guided by management’s principle that the company shouldn’t take a pre-tax profit margin of more than 13-17% of revenue, with any surplus returned to customers to make the product even more appealing, a so-called flywheel effect. Wise currently makes significantly higher margins than that. 

Rightfully, the market takes management seriously when it says it intends to lower margins. That’s a difficult thing for quarterly-obsessed market participants to swallow. It’s a little easier for those investors who, like management, have their eyes on the long-term prize.

That prize is rapid growth for a decade or more. The nascent platform business, where the company provides its solution to customers of other financial institutions, is illustrative. While the platform segment is currently small, management has said it can be the largest part of the business over time. 

In June, Wise signed up the large and rapidly growing Brazilian digital bank Nubank (NYSE: NU). No surprise there. More recently, it signed up the 150-year-old Asian-focused bank Standard Chartered (LON: STAN). Even more surprisingly, it jagged parts of the business of global investment bank Morgan Stanley. Financial institutions that recognise the advantages of giving their customers the best deal possible are choosing to partner with rather than compete with Wise. We think that says a lot.

Wise PLC share price performance

Source: Bloomberg

Patience pays

Price also matters, always. The attractions were clear but we waited patiently for the right price. We got our shot in September and October 2024. The stock is already up 60% on our average purchase price. Some has been taken off the table already, but the Fund maintains a worthwhile investment in the stock.‍

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