Since the company’s direct listing at the beginning of July, the Wise (LSE: WISE) share price has surpassed all expectations. The stock is up around 21% from its listing price of 800p.
Some analysts had speculated the stock would underperform, just as its peer Deliveroo had in the days and weeks after its IPO. But it seems as if the demand for Wise shares has been much higher than expected.
Initially, I was planning to buy shares in the company. However, I’ve been caught out by the rapid appreciation of the Wise share price. As such, I’m now starting to wonder if I’ve missed the boat, or if the stock is still undervalued compared to its potential.
The last time I covered the company, I noted it processed around £54bn of currency transactions for its 2021 financial year. While this might seem like a significant sum, I also pointed out the global foreign exchange market is worth £4.7trn a day. These numbers suggest Wise hasn’t even scratched the market’s surface.
Moreover, unlike many other technology companies, the firm isn’t spending huge sums on marketing to generate sales. Spending on marketing isn’t necessarily bad, but some tech groups, such as Deliveroo, are spending so much here that they’re struggling to turn a profit.
That’s not the case with Wise. In its 2021 financial year, the company reported a profit after tax of £31m, up more than 100% year-on-year.
So, the group isn’t only growing rapidly, but it’s also still a tiny fish in a massive pond with cash to spend on capturing additional market share.
Risk versus reward
These are all desirable qualities, and I think the company deserves a premium valuation for these reasons. However, at the time of writing, the Wise share price is selling at a forward price-to-earnings (P/E) multiple of 173. This valuation leaves no room for error at all.
By comparison, US peer PayPal is trading at a forward P/E of 59. I’d argue this US giant has a much stronger brand and more extended global reach than Wise. Therefore, it deserves a higher valuation.
PayPal could also become a significant challenger to Wise if it wanted to. The company has the headroom to slash the fees on its foreign exchange transactions, which may decimate the London-based business.
Considering these factors, I think the Wise share price may struggle to head higher. Personally, I think the stock is now overvalued, and I’d rather buy PayPal at a lower multiple. Other investors may have the same opinion, which could put the stock under pressure.
If shares in the money transfer business fall to a more acceptable valuation, I’d be happy to buy the stock. Nonetheless, I wouldn’t pay the current price.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended PayPal Holdings. The Motley Fool UK has recommended the following options: long January 2022 $75 calls on PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.