Wirecard: Is It Too Good To Be True?

Summary

• Wirecard's fundamentals are outstanding and the company projects to double its revenue and net income by 2020.
• There's been accusations about Wirecard's acquisitions in Southeast Asia from research companies and hedge funds. The accusations include money laundering, corruption and other illegal activities.
• Wirecard addressed these accusations in a brief statement, but there are still unanswered questions that needs to be clarified.

Wirecard in brief

Wirecard (OTC:WRCDF) helps companies accept electronic payments. They also issue some of the payment instruments such as cards and mobile payment solutions to provide an end-to-end infrastructure. The business model is basically to enable transactions to be completed between customers and retailers with secure and convenient way. This €5 billion market cap company has 22 thousand customers, 2300 employees and over €45 billion in transactions annually. Revenue is categorized in consumer goods, digital goods and travel & mobility. Some of the customers who use Wirecard's (OTCPK:WCAGY) platforms are: LIDL, Shell, Sky, Microsoft, Orange, Vodafone, AirFrance, Copa Airlines and Enterprise to name a few. They are mainly present in Europe and in Southeast Asia, but they are planning to expand aggressively throughout the world. The CEO Markus Braun stated that they are planning to double the company's size by 2020.

This sort of financial technology space is highly competitive and considered as a hot sector to be in. Looking purely to Wirecard's numbers and going through the annual reports, the company seems like a solid investment but during this spring Wirecard has received bad publicity from hedge funds and independent researchers. Investors who are considering Wirecard should read the allegations and form their own opinion and weigh the risks and rewards. More about the allegations after the company's fundamentals.

Source: Bloomberg

Fundamentals

During the past five years Wirecard has been able to execute at an impressive rate, growing revenues at CAGR of 23.71% and net income of 21.5%. In this growth period the company tripled its value and returned five times more than the German performance index, DAX. They have acquired several companies mainly from Asia to complement their fast growing business.

Wirecard has benefited massively from the digitalization in the commerce space. They grew consumer goods transaction volume by 33.3%, digital goods by 31.6% and travel & mobility by 28.6% in 2015. Consumer goods represents 45.9% of overall sales, digital goods 34.1% and travel & mobility 20%. Platform customers average transaction volume is around €2 million and Wirecard's margins are from 1.02% to 2.21%. They are expecting the strong favourable market conditions to continue and the global e-commerce market to grow at 16% to 17%. Wirecard's guidance for 2016 is without any acquisitions and without the one-time payment from the Visa / Visa Europe merger. The pure organic growth is considered to be between 22%-24% and EBITDA around €290 to €310 million range. They usually guide conservatively and raise the outlook during the year.

In a recent capital markets day they even shed light on Wirecard's projected financials in the 2020. They guided more than €160 billion in transaction volume, revenue more than €2.1 billion and EBITDA margin of 30%-35%. So the management projects that Wirecard will triple the transaction volume and double the revenue and EBITDA in the next 4 years.

Considering just the numbers the company looks enticing and the market is pricing it at a clear discount compared to other rivals.

Source: Wirecard IR. Earnings per share shown on the right axis. Figures in millions of EUR except per share.

Allegations

During this spring Wirecard, several hedge funds and an independent research company have been on collision course. There's been a lot of attention for a company of Wirecards size. In February the independent research company called Zatarra published an 100 page long document about widespread corruption, money laundering and other illegal behavior done by Wirecard and its senior staff. Following this report the stock plummeted for a couple of months losing billions in market capitalization. They even responded to the article and the stock price stabilized for couple of days. But these allegations can't be undermined and they will haunt Wirecard until management addresses it with more transparency.

The research company Zatarra, used only publicly available information and were able to reveal Wirecard's shadier side. Going through the documents I'm sure it sparked the German regulators interest. Major news agencies have covered about Wirecard such as Financial Times, Bloomberg and Reuters. I recommend people to look into the research and see how much they were able to find out just from the public information.

Following the report short interest on Wirecard's stock has increased rapidly. There's around 4.5 million shares shorted or 3.6% of the float. Wirecard's stock is fairly liquid and it would take about 7 days to close all the shorts if calculated by the average volume.

Source: OTC markets. Figures in thousands.

I listened to the Wirecard's latest Q&A with the management which was held at the capital markets day last month. Most of it was about the company's performance and the presenters seemed passionate/optimistic about their business's. But some of the analysts sitting in the room were a bit skeptical and there were some unconventional questions. One was "How did the senior officials meet the CEO of GI retail before Wirecard decided to acquire it?". Other peculiar question was about the smartphone applications that Wirecard provides. The analyst noted that the download figures were extremely low compared to the volume Wirecard processes and that in the app reviews there were mentions about fraud. Management responded with little or no clear answers to the question. They also repeatedly mentioned that everything is audited internally and externally by their auditor.

Conclusions

The situation about Wirecard is developing and until there are answers to the questions it's hard to quantify all the risks. If the risk for large legal actions and/or fines materializes it would plummet the stock. Even the possibility of the aforementioned threats keeps me from buying. But I'm most curious to see how this will play out.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.