One stock I have been following for some time is the global payments company Wirecard AG. The company has shown impressive year-over-year growth in both revenue and profit, and until this year made investors very happy. I personally had a positive experience with Wirecard having received its pre-paid debit cards issued on behalf of blue chip American companies. Both customer and partner growth globally has accelerated. So why haven't I pulled the trigger and taken a position in this growth stock? For one thing, Wirecard's business model is difficult to understand. Here is how the company describes itself:
"Wirecard is one of the world’s leading independent providers of outsourcing and white label solutions for electronic payment transactions. The Wirecard Group has been supporting companies in accepting electronic payments from all sales channels. A global multi-channel platform bundles international payment acceptances and methods, supplemented by fraud prevention solutions. When it comes to issuing their own payment instruments in the form of cards or mobile payment solutions, Wirecard provides companies with an end-to-end infrastructure, including the requisite licenses for card and account products."
Acting as middleman for global payments brings to mind criminal enterprises and money laundering. And, in fact, the company has its roots in doing business with gambling operations and porno sites. Marcus Braun, the Austrian computer scientist who took control in 2002 and now owns more than 7% of the outstanding shares has done much to clean up the act and expand the services offering.
But then there is the bizarre feud with the Financial Times. On two occasions this year, the FT published reports that Wirecard had wildly inflated revenue numbers of two subsidiaries. Wirecard forcefully denied the allegations of fraud and apparently retaliated with spying on the venerable London paper. In any case, both times several large institutional investors dumped their shares and the price plummeted. Wirecard shares (traded on the German exchanges and the OTC market in the US) have since recovered as the company continues to post positive results.
But can we believe the numbers? Markus Braun has brought in KPMG to audit the subsidiaries in question, and that apparently reassures at least some investors:
The stellar fundamentals Wirecard is posting and is expecting are meaningless to investors as the market is wondering if these are actually too good to be true. A final verdict is not possible for an outsider and only a comprehensive and sophisticated external audit may help to eliminate all that uncertainty and doubt. Meanwhile, I am also torn between buying, selling or simply holding my stock and by giving management and the auditors the benefit of the doubt I see Wirecard as a "wait and hold" while at the same time remaining amazed about all the wonderful partnerships Wirecard is announcing almost every month which seem to play little or no role whatsoever right now.
My own position is "wait and see." KPMG is an excellent firm, but if the management of its clients is intent on committing fraud an audit will not expose this. I think back another high-flying company - Enron - which also had an opaque network of subsidiaries and partners. The massive fraud eventually destroyed its auditing firm - Arthur Anderson. I myself was an eyewitness to the 1994 Balsam AG scandal, in which banks and investors lost over $2 billion. In that case, Price Waterhouse Germany signed off on fraudulent accounts receiveables generated by Balsam management.
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