The Wise (LSE: WISE) share price is at 997p, and could soon break its first major resistance level of 1,000p.
With an initial listing of 800p, that’s a 25% upside so far for initial investors who bought in at its IPO on 7 July. I think the reason for the 1,000p resistance level is speculators cashing out of their positions. As long-term investors start to make up a larger proportion of shareholders, I think the breakthrough becomes more likely.
With a sky-high price-to earnings (P/E) ratio of 127, are Wise shares worth the risks?
Profits and growth
Wise’s FY21 results was released just before its IPO. It was full of good news, helping to explain its buoyant share price. CEO and co-founder Kristo Käärmann reported that 3.7m customers are now using Wise, a 28% year-on-year growth for personal customers and 56% growth for business customers.
Revenue was up 39% year-on-year to £421m, while profits more than doubled to £41m. The company expects revenue growth of between 20% and 25% over the next year, maintaining an EBITDA margin of more than 20%.
These are all encouraging numbers, but I think a sense of scale is required to put the Wise shares into perspective. Money Transfer Comparison calculates that more than $2.5qdn dollars flow across borders every year. This unimaginable number leaves Wise with essentially infinite room to grow. It’s also a reminder that to the global financial markets, it’s still a very small fish.
Are Wise shares worth the risk?
PayPal (NASDAQ: PYPL), by comparison, has 305m user accounts, making it one of the largest digital payments firms in the world. With revenue of $21.45bn last year, the company is plugged into eBay and Amazon, along with most other online retail sites. Statista reports that 36% of US retailers already accept PayPal, with 19% of its payment volume being cross-border transactions.
If PayPal chose to reduce money transfer fees to match or even outcompete Wise, I think Wise shares and company itself could be in huge trouble.
Wise is still a new financial technology (FinTech) company. This is an immediate red flag for me. For every PayPal, there’s a hundred companies like Wirecard, Pay By Touch, Simple, Clarity Money, GoBear, Wonga, and Xinja. If you haven’t heard about some of these companies, there’s a reason why. They all failed. And there’s no guarantee that Wise will be any different.
However, if I’d invested £1,000 into PayPal at its IPO in 2002, my shares would now be worth £16,500, a 1,550% return on my investment. And let’s not forget that its IPO came during the fearful atmosphere after the dot-com bubble crash. With a share price of $276 and a market cap of $325bn, I think PayPal is a much stronger competitor.
My bottom line
Wise markets itself on being six times cheaper than traditional banks, with no hidden fees. As a consumer, I can see how this would appeal. There is a chance that it could become the market disruptor that it clearly sees itself as.
But for my money, PayPal is a larger company with fewer risks. It has a price-to earnings ratio of 67, nearly half that of Wise. I think that in the near future, the Wise shares will either rise astronomically, or fall spectacularly. That’s a risk I’m not prepared to take. I’d buy PayPal instead.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon and PayPal Holdings. The Motley Fool UK has recommended eBay and has recommended the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, short January 2022 $1,940 calls on Amazon, and short October 2021 $70 calls on eBay. 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.