Wirecard Has a $17.5 Billion Question To Answer

(Bloomberg Opinion) -- Wirecard AG has strongly denied fraud allegations reported by the Financial Times last week. But that hasn’t stopped about 5 billion euros ($5.7 billion) being wiped from the German fintech darling’s market value in a matter of days. Even if the allegations are as unfounded as the company says, there are valid questions about whether the payments processing specialist justifies its generous valuation (it was worth more than Deutsche Bank AG at the start of last week). Hedge fund manager Crispin Odey, for one, made a large bet against the firm.

The FT’s reporting alleges that suspicious transactions in the millions of euros were flagged internally at Wirecard – which processed some 90 billion euros of payment volumes in the first nine months of 2018 – but with seemingly no resulting compliance action. It also alleges that a law firm hired by the company to investigate its Singapore office found evidence suggesting “serious offences” such as forgery or faked accounts. Wirecard has denied the reports, saying that a member of its team had flagged potential compliance breaches for the 2015-2018 period but that it deemed them to be “unfounded.” It said neither the company nor its external law firm had made any “conclusive findings” of misconduct.

While these are serious charges, it’s not the first time Wirecard has faced accounting allegations, and it has always denied any wrongdoing. Singapore police are looking into the latest claims. At the same time, the German financial regulator BaFin is examining whether any market manipulation may be linked to the FT reports, given the short-sellers circling the firm.

Wirecard Has a $17.5 Billion Question To Answer

But part of what makes investors so skittish is the amount of optimism baked into Wirecard, whose valuation was looking very stretched before its recent drop. A near-fourfold increase in its stock price over the past two years, before the FT reports, was driven by breakneck expansion, headily optimistic long-term forecasts and faith that the firm can become even more profitable despite operating in a fiercely competitive market.

Even now, the stock trades at about 30 times full-year earnings, giving it a market value of 15.4 billion euros ($17.5 billion). That multiple is higher than the sector average, which has its fair share of even pricier startups such as Dutch rival Adyen NV. A reality check was always likely.

The company’s bullish targets have already raised eyebrows. It expects to lift annual sales five-fold to 10 billion euros by 2025 and underlying earnings sixfold to 3.3 billion euros. That’s years of double-digit growth rates and a rise in margins. It justifies this in a variety of ways: A big presence in Asia; extra services to sell to its merchant customers; and a restructuring after recent acquisitions. Yet quarterly earnings throughout 2018 have pointed to profit margins shrinking, not expanding. As Wirecard stops chasing deals, growth looks harder. The pressure to boost volumes may encourage taking on smaller, riskier clients, reckons Mirabaud’s Neil Campling.

Investors are clearly nervous about the potential pitfalls from trying to capture a bigger slice of the digital payments market while ramping up the profits taken on that slice. Wirecard will no doubt offer up more detailed objections to the allegations, starting with an investor call on Monday. But the nuts and bolts of its payments business, and specifically its promises of heady growth, need explaining too.

Wirecard has successfully fought off accusations of wrongdoing in the past, and may do so again. But you don’t have to be Odey to think caution is justified.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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