Should I invest in Wise after its share price fall?

Shares in UK FinTech company Wise (LSE: WISE) – which went public in July – have experienced a sharp pullback. Less than a month ago, the stock was trading near 1,175p. Today however, the share price sits at 900p.

Has this 20%+ pullback created an attractive entry point for me? Let’s take a look.

What I like about Wise

There are a number of things I like about this business. For starters, I think it offers an excellent service. I’ve used Wise’s FX transfer platform for around eight years now and I’ve always been impressed. To my mind, Wise offers a best-in-class service.

Secondly, the company, which now has over 10m customers, is growing at a rapid rate. For the year ended 31 March, revenue came in at £421m, up 39% year-on-year. For this financial year and next, City analysts forecast revenue of £532m and £671m respectively. That represents top-line growth of 26% per year.

Third, unlike many smaller FinTech businesses, Wise is already profitable. Last financial year, it delivered a profit of £30.9m. Return on capital employed – a key measure of profitability – was 11.1%, which is solid.

3 risks that could hit the share price 

However, I do have some concerns about Wise shares. My number one is in relation to competition. In the years ahead, Wise is likely to face intense competition from rivals such as PayPal, Remitly (which recently had its IPO), Azimo, XE, OFX, Currencies Direct, and more. These companies, and others, could potentially steal market share. Wise certainly offers an excellent service right now, but there’s nothing to really stop a rival creating a superior service.

Another issue is the fact that CEO Kristo Kaarmann was recently fined £366,000 by HMRC for defaulting on his taxes. There’s speculation that this fine could lead to sanctions from the Financial Conduct Authority (FCA). This is one of the reasons Wise’s share price has dropped. It adds a bit of uncertainty.

Finally, there’s the valuation. At the current share price, Wise sports a forward-looking price-to-earnings (P/E) ratio of 160 and a forward-looking price-to-sales (P/S) ratio of about 25. These figures are quite high, to my mind.

I think Wise deserves a higher valuation because it’s growing rapidly and already profitable. However, the current valuation doesn’t leave a margin of safety. To put these valuation figures in perspective, FinTech giant PayPal, which I own shares in, currently has a forward-looking P/E ratio of 56 and a forward-looking P/S ratio of about 12.

Wise shares: should I buy?

Weighing everything up, I’m happy to leave Wise shares on my watchlist for now. I do like the company. However, I’m not 100% convinced the stock offers an attractive risk/reward balance right now.

All things considered, I think there are better UK stocks I could buy.