What Wirecard’s woes can teach about investing

It takes a big story to break the monopoly of Covid-19 in the news. In recent weeks, one company, Wirecard, has been grabbing headlines for all the wrong reasons. Once Europe’s most valuable technology company, Wirecard dismayed investors in June by releasing a statement admitting to a €1.9 billion black hole in its accounts. In response, the company’s share price has fallen by more than 95%; the chief executive had been arrested on suspicion of fraud and fingers are being pointed in the direction of the auditors.

Thankfully, accounting fraud of this magnitude is uncommon but is, by its very nature, concealed from potential shareholders. Nonetheless, it’s an investor’s job to subject prospective holdings to rigorous scrutiny, to look past a persuasive narrative from silver tongued executives and to assess the fundamentals of the company. For that reason, it’s worth examining how this, one time, fintech king lost its crown.

One issue is that Wirecard, which provided credit card and other payment processing services, fell between the cracks when it came to regulation. BaFin, Germany’s financial watchdog, has come under fire for failing to sanction or caution Wirecard, as it classified the company as a tech firm. While some regulation can be viewed as heavy handed, its absence, particularly in financial companies, can leave corporate banana skins that investors should be better informed about.

The bigger issue in Wirecard’s case seems to be that investors wanted  the success story to be true – having already sunk their money. They were emotionally, as well as literally, invested. Wirecard’s unique selling point was its advanced technology, which set it apart from a more pedestrian payments processor. Rumours swirled that things weren’t quite right, but most investors dismissed these as unsubstantiated. Even after whistle blower allegations were highlighted by the Financial Times (FT), fund managers piled yet more investor cash into the stock, even as the price fell, effectively betting that the FT’s reporting was wrong.

So, what can Wirecard teach investors? This jeremiad is another reminder of the importance of being objective. It doesn’t matter how persuasive a company’s story appears to be, it’s an absolute must to scrutinise the fundamentals and how its business model intends to make money. Sometimes a basic sniff test is sufficient; if something smells fishy, steer well clear.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.