The United Kingdom has the sixth-largest economy in the world and is a great place to diversify one’s investment portfolio. According to EY data, the country generated 4% gross domestic product growth in 2022 and is forecasted to narrowly miss a recession in 2023 with 0.2% growth expected.
The U.K. is not known for its technology industry, however, there are a few companies that have solid popularity throughout Europe. In this disucssion, I will break down my two technology stocks that, in my opinion, may offer good value.
Wise
Wise PLC (LSE:WISE, Financial), formerly known as TransferWise, is a payments company that has a mission to enable money movement “without borders,” Traditionally if an individual wished to transfer money from one country to another, it would have to be routed through various intermediary banks, all charging high fees and the process taking multiple days.
The company solves this problem by having a registered entity in over 175 countries and thus enabling direct transfers. In addition, the company offers the gold standard in multi-currency accounts. For example, a user cannot just store pounds, euros, U.S. dollars, etc., but it offers exact account details for these currencies. This means you will not need to convert your currency before sending, which saves on fees. If a user then wants to convert afterward, they can take advantage of the low-cost rates via the interbank exchange.
Its transparent pricing feature means users are aware of the fees upfront, unlike the estimation which occurs when sending money traditionally.
To take the transparency even further, Wise publishes its roadmap of new features online. To scale the platform, the company has announced API integration, enabling businesses to integrate the company's platform directly into their applications.
Growing financials
Wise reported strong financial results for its fiscal fourth quarter of 2023. Its revenue of 223.5 million pounds ($280.7 million) increased by 45% year over year despite a 1% decline sequentially.
This was driven by a 25% increase in total money volume transferred to 26.7 billion pounds, in addition to 6.1 million active customers, up 33% year over year.
Its personal customers still generate the majority (19.5 billion pounds) in volume, up 23% year over year. However, its business customer volume is growing at a rapid 30% rate year over year.
Its volume per customer did decline by 7% year over year. However, this is believed to be driven by macroeconomic forces such as payments for property purchases, among other things.
Wise charges a small take rate of 0.65% per transfer, which is up just 4 bais points year over year. Over time, the company has to continually lower its prices for consumers, thereby increasing adoption. This may seem crazy, but Amazon (AMZN, Financial) adopted a similar strategy in its early years. The company created a “virtuous cycle” in which it continually lowered prices for consumers, offered free shipping, etc. This strategy is referred to as “scaled economics shared” and it should benefit Wise in the long run if the company can get its message across effectively.
This strategy is also necessary given the fierce competition in the market. For example, privately held fintech company Revolut offers zero fees for transfers to other Revolut accounts and free transfers in Europe. Internationally, however, it charges similar fees to Wise, but this does vary by currency and country. Given Revolut has grown to a 33 billion pound private valuation, Wise has huge potential in this market with a 6 billion pound market capitalization at the time of writing.
In the trailing 12 months, Wise generated operating income of 84.9 million pounds at an 11% margin. This is fairly good as the business is targeting a 20% adjusted Ebitda margin and 20% income growth in fiscal 2024.
Wise has a fortress-like balance sheet to weather any economic storm with 2.3 billion pounds in cash and short-term investments. In addition, the company has low long-term debt of 103 million pounds.
Valuation
Wise trades with a price-sales ratio of 6.65, which is cheaper than historic levels.
Darktrace
Darktrace PLC (LSE:DARK, Financial) is a cybersecurity company that was founded by cyber experts at Cambridge University and backed by British intelligence agencies.
Whe artificial intelligence has become popular recently, Darktrace has been using this technology since its founding in 2013. In fact, the company has over 80 patents in the AI and machine learning industry.
Given the rise of AI, many security leaders fear increasing breaches from AI-powered bots. Therefore, it is no surprise the cybersecurity industry as a whole is forecasted to grow at a 13.8% compounded annual rate, reaching a value of $424 million by 2030.
Darktrace offers four main products: Prevent, Detect, Respond and Heal solutions.
Secure financials
Darktrace reported solid financial results for the third quarter of fiscal 2023 in April. Its revenue of $139.2 million increased by 28.1% year over year.
This is solid growth given the tough macroeconomic environment. Darktrace managed to add an extra 225 net new customers, up 22% year over year to a staggering 8,403.
Its churn did increase slightly from 6.5% at the end of 2022 to 6.9% as of March 2023. However, overall retention was solid at 104.6%. This means its customers are generally sticking with its products and spending more.
Its adjusted Ebitda margin was at the top end of management's 18.5% guidance.
Darktrace has a solid balance sheet with around 380 million pounds in cash and short-term investments, in addition to minimal debt of 64.4 million pounds.
Valuation
Darktrace trades with a price-sales ratio of 7, which is cheaper than its historic levels.
Final thoughts
Wise and Darktrace are two of the best British technology stocks.
Wise is poised to benefit from the continued growth in the fintech industry and the movement away from traditional banks. Meanwhile, Darktrace is expected to benefit from the growth in AI and cybersecurity.
Both stocks have seen significant pullbacks in share price since 2021 and, therefore, may offer huge potential for investors long term.
