$WISE and Contrarianism

In this episode of The Acid Capitalist, Hugh Hendry dives into the volatile world of FinTech, analyzing Wise and its market positioning compared to giants like PayPal. He shares insights from an encounter with a young, die-hard value investor, dissecting the risks of stock-picking in a sector riddled with landmines.

Are FinTech disruptors truly innovative, or are they just banks in disguise riding the interest rate wave? Hugh breaks down the hidden risks of cash transfer companies, the role of interest income, and why pricing wars could push margins to zero. With PayPal’s stock crumbling and Wise at an all-time high, is this the next big breakout or a ticking time bomb?

Join Hugh as he takes a contrarian look at the forces shaping FinTechs, from the battle for profitability to the long-term sustainability. 

Transcript

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Wow. It's been a while, guys, since I spoke into the microphone. I think it was the eve of Christmas. Yes, Christmas Eve, and I was doing the podcast. What has happened to me? I think I have a bipolarity. Um, I think sometimes I have so much confidence. I come across as conceited. And then other times I have zero confidence. I'm like, you know, those vlcc F's, those very large crude carriers. I'm a very whatever I can do the acronym anyway. Um, I've been working my way back. Um, been writing a few pieces of stock analysis, taking me back a long time as those in Edinburgh in my early 20s. But today, today's forum. Um, I thought, why not? Uh, committed also to the audio and you can listen to it walking the dog or in the car. You don't have to read it. And it was inspired because a while back, maybe a year or so, I met a young British investment manager. Um, I mean, he's like a value hustler. And he had a growing AUM. You know what that means? AUM arch University. Michael. Assets under management. Um, some money was coming in, and he was looking to put together a squad of sharp minds, and. And he felt he needed some mentorship. And I thought, well, don't you, you know, it takes, um, it takes maturity, um, to have that yearning, that appetite, uh, to recognize there could be more. And so I was certainly intrigued. And I reckon the best way, the best way to know a man is to look at his risk appetite. And so that's what I did. Um, I got his portfolio and I looked at his big conviction of heavens. Everything was conviction with his kid. I looked at the stocks he owned. And what did I find? He was. He was rich. Rich and an analytical zeal. And maybe too much. I thought he was a true a value guy, a deep value, stock picking, bottom fishing, you know, the last man standing type, a purist, the kind of scans, the daily financial rubble. He trips through the graveyard at midnight, the graveyard of missed expectations. Obviously, I've seen this kind before, especially again back in Edinburgh many, many moons ago. Fierce, disciplined, a fundamentalist, a Taliban firebrand mouthing off his valuation metrics to know one in particular. Me. Well, me, I am a stock whisperer. I read their charts. I smell the momentum before it manifests into wider buy recommendations. I get the ghosts, the phantoms of the market to tell me their secrets. And I don't play the risk game without a price signal, a twitch, a stir, a pulse of life in the corpse. Give me anything because I need something before I try to call it necromancy. Neck. Necromancy. Neck. Neck. Necromancy. I write these fancy words down. Necromancy. No necromancy. Not necrophilia. Not making love with dead body corpses. Um, but this British fund manager know such superstitions or taboos. Again, he's doing necromancy, not necrophilia. Uh, this guy just cold hearted, cold, hard valuation models. No price trends, no sentiment gauges. Just I mean sentiment gauges. Sentiment gauges for the for the crazy people. Um, there's like liquidity if I see another person mouth off about liquidity. When someone if challenged the next time, what is liquidity? Give me the definition. It's just such an easy thing to say and an impossible thing to actually, um, to define. Anyway, the kid just faith and discounted cash flow. God help them. Um, I try to bring them into the light. I was like, come on, young Padawan, allow me to show you the ways of the asset capitalist. But now he wasn't having it. And he wouldn't budge. Stubborn. Unrelenting. So we obviously be parted ways, but he still sends me his monthly letters, and I always read them. And so I, I wanted to. To send you another missive from the random engagements that I encounter daily during my my languid but joyful days of curiosity on the blessed island of Saint Barts. Um, I wanted to show you how my mind reacts to show you the questions that I. That I ask myself, and the charts that I seek out. Now, first and foremost, I write this as no expert on fintech, and I certainly am not offering any nada, nada, nada investment advice. My hope is that some of my. What should I call it? My situational risk experience. I'm hoping that that will shine through and you'll have a better understanding of how I quickly form investment. Opinion. Prejudice I become prejudicial. How does the asset capitalists become prejudicial? So here's another stock review, ladies and gentlemen, for your consideration. But again, before before we dive in to the stock, I wanted to say that that that word contrarianism hugely misunderstood the noble art of going against the herd, of thumbing or cocking a snoop, but thumbing your nose at the consensus. I'm touching my nose. Is it changing my voice? Allo allo allo. Um, but let's get something straight. Contrarianism isn't about simply betting against the market. I mean, that's just rookie shit. No real pros. They don't buy. I mean, they do. They buy beaten down stocks, but they don't buy them just because they're cheap. And God, how I hate that. Downward cheep cheep cheep cheep. That's what birds. That's what birds say. Lonely. You want to sound sophisticated at dinner parties? You don't talk about cheap stocks, you say. Oh, heavens, that stock is lowly rated. That's much better. Stay smart, stay sharp, stay wise. We'll come to. Hold on. Uh. So I want to say to the smart money, if there is such a thing, it buys. When the market reluctantly whispers and flashes a green light, a faint, an improbable price trend. Endorsement. No more, no matter how tenuous. It's an endorsement that the lunacy unfolding in your imagination might just actually make sense and be starting to work. So the stock insight companies code wise. W I s e. And again hold, hold. Pause. Um, sorry. Just I'm having an interruption from my from my memory circuits. Um, I remember when I was working in Edinburgh, Baillie Gifford, we were the largest company in a milk delivery company. Yeah. I mean, I think it was a network, and it was kind of always invest in the last. Um, what do you what do you call the guy who changes the shoes on a horse? You know, the that the the the you you are Shoesmith. Hammersmith. Blacksmith. Blacksmith. Um, it's a bit like that. You're like, um, you you you have local monopolies. Um, anyway, they were called Wiseman Dairies. They were from Glasgow. This is not a this is not about milk. Heavens. But maybe maybe it's about milking it. Wise is a British listed stock. Now I use wise. I use their service. Um, with regard to your credit card transactions on the paywall subscriptions, and I've got to say, they're good. I got no complaints, and I can't imagine that I'm going to change supplier, that I'm going to replace wise anytime soon. So there's definitely a reassuring, what would you call it, a customer status quo adrift for this business. I'm too lazy to change it. And it doesn't take the Chargers so little for me again to bother to really want to change it. Now, if I had to explain wise to nincompoop sounds like me, but to someone who knows nothing about our world, I'd say it's like PayPal. PayPal without the rip off that you get the official exchange rate. Because, you know, for me, I'm, um, I'm research, I'm receiving from different currencies and is coming into dollars. And then, you know, I've got expenses sometimes in euros, sometimes as sterling. So you get an official exchange rate, their official, their foreign exchange rate, you get it. And a transparent fee. No. That overlooked for the fee. Um, and and it's like a bank that holds your money. but they earn the interest, not you. Cheeky buggers. Um, so they're kind of profiting from sloth, and I like that. Albeit, having mentioned that, I must look at my wise cash balance and look to transfer it into an interest earning account. And I think they are actually offering beginning to offer interest bearing accounts and possibly credit cards. But again, we'll come back to this. We're just talking about a bank, a disruptor, but a bank anyway. Um, you know, but I mean a bank, a bank dressed up as an expensive tech stock. Well, that's just that's that's a warm notice in my head. Um, but the real, real question. Yeah, the bank question. But the real, real question isn't Weather-wise is the new PayPal. No. Is whether you even want to be in this business of cash transfer at all. Um, because yeah, there's growth. But again, is it sustainable or is it just a brutal game of attrition? That would not be good. Are we looking at a British fintech powerhouse or will perpetual pricing wars chase the profit margin all the way to zero? Conundrum. And with all that interest income from sitting on the customer balances, iPads, the profits they make more on that interest income than they do in profits. So how long before that cushion is used to finance more price cuts? I mean, maybe do the do the cash transfer for nothing, just for the right to take the carry on the customers balances. See what I mean? Anyway, the standout in all of this is PayPal's share price chart and so you can't see it. You're just listening to this. But here's what it looks like. Holy shit is a bear market. The stock the stock was crushed. Fell 85%. Peak to trough peak being the pandemic highs. Um, market had inflated into a Covid bubble. You know, we're sitting at home or buying stuff. So fees, cash transfers. Um, and then the market as it does. Punctured it without mercy. Um, but then over the course of about two years, a classic price pattern was developing, and it was really quite promising. The the stock at PayPal, it looked quite cheap. Cheap, cheap, cheap after two years in sin since then. Um, and the stock the stock had recorded no new price lows. It was stabilizing and it was just slowly beginning to make modest year over year new price highs. I mean, lots of it. Find a floor and maybe it was about to rip higher and then and literally then was earlier this week. Bom bom bom boom boom boom. Another profit warning. And the stock I mean the stock I mean trust me people the stock got obliterated. Now meanwhile, wise is writing his own magic carpet in a parallel universe and is bounced back. Sure, there's been kind of three years in the purgatory of the money transfer. The stock price abyss. Abyss kind of going down, going sideways. But wise is nice. Is trading close to an all time high. Seems to be an unaffected by the PayPal profit warning. Now my British contrarian comrade, the fundamentalist. He is loving it. His logic. HSBC, you know the big bank. Well, they just killed off their challenger. Cash transfer apps called zing and Zing. Zing had no ping zing zing nozzle zing zing zoom zoom. And we stop it. Um. Big bank, really proficient. A big presence in foreign exchange. Couldn't make it so big. Big, big bank waves the white flag and there's why's all kind of triumphant. Seems like a nice David and Goliath kind of thing. But. But here's the problem. I've seen that kind of oh, I didn't I didn't I didn't press, I didn't press. This kills me. Um, welcome to my world. Um, I didn't press a sleep on my telephones. You hear all these pings, the pings I just received? Welcome to my world. What did I just receive? Um. Scatterbrain going crazy, I received. Um. Now who knows? Who cares? Um, where were you, my dear friends? Um. Yeah. The problem. I've seen this kind of reasoning blow up in your face. I've seen stocks fail at this exact price point right when they're supposed to break out and double. Because one name that I haven't mentioned kind of lurking in the shadows is Apple and probably Amazon. And they don't really need to make a profit on money transfers. They just need to keep you locked into their digital Ecosystem. And when a business like Apple, Amazon. When they're up against a company like Wyze and they don't even need to make money from the service. I mean, as a shareholder, I would start sweating briefly talking numbers wise, an 11 billion, uh, sterling company, uh, with a, I have to say, a fortress like balance sheet. And it is it's a great thing. It's a prodigious cash flow generator. Profits are cash, but it's a comparative tiddler. What is a tiddler? What I mean is that even after the gyrations, the law and PayPal's valuation is still an $80 billion beast. I mean, I haven't I mean, how big was PayPal during the pandemic? Um, this fintech gladiator match, dare I say it's not? It's not a match between equals, David and Goliath. It's been a scrappy upstart and a wounded giant with. With a lot, a lot of cash left in the tank. So would the Titan by the British company. I mean, it kind of seems plausible, although I don't see much comment on it. And and I am certainly not seeking to start rumor, just like it came to my mind. I'm trying to I'm trying to. It's like those guys who do the rap, they're just making up the words, I'm making this all up, people. Um, so so what are we? Market markets? And hey, listen. But, you know, we got to watch out for landmines. And then I'm going to say it. Aiden or Aiden? Iodine. Uh, a Dutch, a Dutch fintech darling. Uh, a stock that set Europe on fire during the pandemic. One of the. Zoom zoom zoom higher stocks which of course got torched blown up back in 2023. Just like PayPal, down 80% from its highs, dropped 40% in one day. Oh my god. Absolutely obliterated. And an absolutely predictable to anyone watching PayPal disintegrate across the Atlantic. And yet. Well of late the stock the stock has staged an impressive comeback. So. Okay, hold on a minute. Why is it sitting close to its all time high again? Was left for dead. Who surged by? But if I was I mean, I always try and be honest. Um, but it looks kind of precarious. I'm not a short seller, but I can see that it's trading at a chart point that I would monitor if I were a short seller, a little bit vulnerable, and PayPal. It looked like its stock price was about to recover, but then it cratered again. And this recent development has been ignored by the Europeans. So what does all that tell you? Well, it tells me that this sector isn't for the faint of heart, that there are bombs literally everywhere. One day it's a moonshot, the next the next is a smoldering crater. These aren't stocks, the hand grenades. And when you play in fintech, you better know when when to pull the bloody pin and when when to throw it away. Which is it? So final thoughts from me. Me. Me as a capitalist. So my British idea of my British fund manager friend. The fundamentalist. He's bullish on Wyze right here right now. He's been holding it. He's done well. I congratulate him. He thinks the stock price is breaking out. He thinks because he's yet to confirm. He thinks that's owing to the HSBC, the big bank and its retreat. And he thinks that profits are becoming free and profitable. Market share is about to launch forward as big banks, um, move away from the space. This is the moment that the Taliban have been eagerly anticipating. Me, on the other hand. I mean, if you heard this expression, I think I make these expressions up. But me, I'm a big girl's blouse. Your girls blouse is. They've got flowers and butterflies. That's me. Um, the company wise, you know, you know, I opened a few tabs on my computer. Uh, why is describes itself as one of the world's fastest growing tech companies. Here's a spoiler. People is not. It's not a company. It's not fast growing. Um, me? I've seen too many stocks hit the launch pad and explode rather than taking off. I've seen so many sure things turn out to be anything. Anything. But sure, I've seen too many US price trends in the sector. I've seen them ignored by the Europeans, only for profit warnings to blow the whole damn thing up. So again, to repeat, I'm no industry expert, but I got to say that all the wild stock price gyrations they leave me plenty of why? I say there's plenty of philosophical consideration that the sustainable level of profitability is yet to be clearly established for this industry. And I don't like that. Because I promise you, I only enter a stalk, a business and industry with a firm, analytical, intellectual impression of the profit margin that the service and the capital intensity of that service demands. So I really don't feel brave enough for this new world. Yeah. I don't want to be a girl's blouse. Transfer the cash transfer of stocks. I mean, well, here's a point. The benefit significantly from you know, the best thing about this business is that you earn a return on the clients cash balances. But it can also be a double edged sword. Let me explain. Um, you know, so they've got billions in customer deposits before transferring funds, and the cash sits in very short term, very little risk. Interest bearing accounts and yeah, generates free money for these companies. And as interest rates as interest rates, um, since the pandemic skyrocketed, then the return, the cash return on using the clients money. I mean that's that's been that's been a bonanza. And it's exactly why why's, why their profits have ballooned higher. They reported almost half $1 billion in interest income last year. I mean, that's a figure way greater than their total profit. And this is an errand from fees on the money transfers, but it's simply earned from them holding my money. I must check how much money I got with them. So head and risk. Sustainable advantage. Mhm. Obviously what happens when rates drop. Bank of England was at five. The now four and a half. If we keep it topical. Central bank's cutting rates this week. So what happens. Um profits shrink. Do they disappear. As the guardian. These customer balances as it withers. Um, and and and the question is the distortion to the real business. If you're making so much on that carry on on the clients money. Are you going to reach a point where you're like, actually, I would do zero fee just to have the carry. You see, so the profit might trend to zero. Now what's the PE people, people investors stock market investors. What PE they're going to put on, um, your uh, return on your customers, your cardio and your customers. Cash balance. Not sure be that high. So. Mhm. You know remember I was warning you. Uh what if they're not true fintech disruptors and just banks in disguise riding the interest rate wave. And and you all know that I think interest rates are coming back close to zero. I'm not a fintech expert expert. And I do not feel brave enough to play there with live grenades. But I would have congratulated the young fundamentalist, the the manager of all that money for his recent success. I would definitely have advised him that it should. He should maybe sell his position. Crikey, I haven't done this kind of things since I was 21, and a trainee in Edinburgh, squinting apologies and trying not to get steamrollered by the grumpy fund managers. He was like old times. But what do you think? What do you think? You people out there? Are you holding wise or PayPal? Or again, do you trust these fintech or are they still darlings? Uh, or is this all just a tick, tick, tick ticking bomb of eroding margins? I don't know, and what. About. Your portfolio? Any stocks you like to throw into the asset capitalists fondness for a good old fashioned. Break. Down? It's more like break dancing than break down. Or maybe I'm having a breakdown. Anyway, hit the comments and let this let let let. I don't know. It's good to be back, people. I do love you. Let's get this debate rolling. Uh, my very best to you all from Saint Barts. Hugh Hendry, the acid capitalist, is back.