Commentary on Political Economy

Monday, 22 June 2020

Wirecard Scandal Makes Tech Investing Even More Expensive

There is no reason to doubt the accounting of other European fintech companies, but there is reason to doubt some 

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The pickings were slim for European tech investors even before the accounting scandal at Wirecard. Now it is even harder to find suitably scaled stocks at a sensible price.
Shares in the fallen German fintech star plunged another 36% on Monday morning after the company said there is a “prevailing likelihood” that the €1.9 billion ($2.1 billion) in cash balances that it couldn’t find last week doesn’t exist. Business partners in countries where Wirecard doesn’t have its own license to operate have provided the bulk of profits in recent years, according to a damning KPMG special audit published in late April. These profits are looking increasingly fictitious.
The architects of the company’s rise quit last week, leaving the cleanup in the hands of an American, James Freis, who was recruited last month to the newly created role of chief compliance officer. The only glimmer of light is that he seems perfectly qualified. A Harvard law graduate who spent seven years fighting financial crime for the U.S. Treasury, he previously ran the compliance and anti-money-laundering functions for Deutsche Börse, Germany’s stock exchange.
To Wirecard’s many critics, the only surprising thing about its implosion is how long it took to come. Why did so many fund managers keep faith even as evidence of accounting irregularities mounted?
One reason is that Wirecard was a rare German tech story the country’s establishment desperately wanted to succeed—and mounted unusual efforts to defend, including a temporary ban on short sellers last year. The company also went to great lengths to silence skeptics, including hiring private investigators.
A third reason holds an uncomfortable lesson for tech investors more generally: Wirecard’s digital-payments pitch was easy to sell. The sector was already hot, and has been made even hotter by the Covid-19 crisis.
Price / sales multiplesSource: FactSet
.timesAdyenSquarePayPalWirecardAug. 2018'19'200102030405060
Other European payment stocks have soared as Wirecard has foundered. There may be a link: As reports of malpractice at the German company became harder to dismiss—notably when KPMG filed its audit—money managers lost one outlet for a fashionable investment theme, forcing them to overuse others.
Wirecard’s closest stock-market peer is a Dutch company also involved mainly in the plumbing of e-commerce, Adyen. In late April, Adyen, which has substantial exposure to the travel sector, said its weekly transaction volumes were tracking down roughly 30% compared with the start of the year.
Yet its stock is up 77% this year. Investors are looking through today’s problems to a post-pandemic world in which Adyen’s payments technology is much more widely used. The market’s base case seems to be an “accelerated and permanent shift to greater e-commerce,” Citi analyst Robert Lamb wrote in a note earlier this month. But Adyen’s stock still looks expensive at a record 52 times sales, compared with 16 times for Square and nine times for PayPal.
This has long been a problem with tech stocks in Europe, where a lot of money chases too few players, and the acceleration of digital trends in the pandemic is only making it worse. Investors in the wider European sector face a more conventional risk than those gullible souls who believed in Wirecard: overpaying for growth that might not come through as fast as hoped.

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