Wirecard makes big German banks look old

The payment service provider Wirecard is worth more on the stock exchange than Commerzbank and Deutsche Bank. Wirecard has shown how digitization can be commercialized in the financial sector.

Wirecard is the name of the company that Commerzbank, a founding member of the DAX in 1988, contested the place in. (Image: Wolfgang Rattay / Reuters)
Wirecard is the name of the company that Commerzbank, a founding member of the DAX in 1988, contested the place in. (Image: Wolfgang Rattay / Reuters)
A rising star from the Munich agglomeration displaces the traditional Frankfurt Commerzbank from the German stock index (DAX). Deutsche Börse announced this on Wednesday evening after 10 p.m. Wirecard is the name of the company that Commerzbank, founding member of the DAX in 1988, contested the position. It is a coincidence that the digital financial service provider is now replacing the big bank with the yellow ribbon, but at the same time the change is symbolic of the change within the financial industry.

With a market capitalization of just under € 24 billion, the company has now left Deutsche Bank (20.3 billion) and Commerzbank (10.3 billion) far behind. The newcomer is now worth more than twelve DAX groups and is the third largest financial group in Germany in terms of market value after the two insurance companies Allianz and Munich Re.

Wirecard, founded in 1999, claims to be an internationally leading provider of electronic payment systems and risk management to minimize bad debts. In addition, Wirecard Bank offers services for business and private customers. Since the company's core business generally does not have any direct relationships with private customers, it is hardly known to the public.

Wirecard technology is used, for example, when customers shop online by credit card. If a consumer pays, for example, with a credit card from Mastercard or Visa, the money does not flow directly to the retailer, but initially to Wirecard, which bears the risk of the transaction and receives a minimal commission. But small cattle also make crap in mass business - and a lot, as the rise of the company shows.

A good 48% of all transactions come from mail order business with consumer goods, 33% from payment transactions for digital products such as music and software downloads and sports betting, and travel and transport account for almost 9% of all transactions. At the beginning of the nineties, Wirecard's services were primarily used by the porn and gaming industries, because companies from these sectors initially focused heavily on internet trading and digital payments. That is why the company once had a grubby image.
In addition, Wirecard was repeatedly criticized by investors and the media because of the complicated and difficult to understand accounting. However, Wirecard was always able to ward off accusations such as balance sheet cosmetics and money laundering.

Under the CEO Markus Braun, who is also the largest shareholder with 7%, the company has shown rapid growth, especially in recent years. At the same time, the forecasts were repeatedly raised and exceeded. In the first half of the year, sales and operating profit climbed by around 40% each. The 48-year-old Austrian and former KPMG consultant Braun has been with the company for 16 years.

With a share price of around € 190 at present, the value of the company has increased by about 170% for one year, 430% for three years and 2900% for ten years. However, with an expected price-earnings ratio of 65 for 2018, Wirecard is extremely highly valued, namely 65 times the profit expected for this year.

In the long run, the course development of the fundamental performance is far too fast, my financial analyst. All valuation figures for 2018 were clearly above the historical values. Accordingly, some observers see a relatively high risk of the stock price falling. Independent Research, for example, believes that it is extremely unlikely that the price will continue to grow significantly faster than sales and profits in the medium term.

Munich, however, should benefit from the online trade and mobile payment systems, which will continue to grow strongly in the future. At the same time, Wirecard is well diversified internationally, since the company only makes around 50% of its sales in Europe, while 40% come from Asia and 9% from America.

In addition to this good regional diversification, analysts consider the high profitability and the strong economies of scale to be strengths of the company, which is a technological leader compared to competitors. However, Wirecard is relatively heavily in debt and operates in a very competitive environment. However, the company shows how to digitalization.