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The Wise share price just surged. Is it a buy?

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The Wise (LSE: WISE) share price has been on a bit of a rollercoaster since the company went public earlier this year. The shares listed directly on the London Stock Exchange and began trading at 800p. By September the share price had reached 1,150p, but quickly fell back down to earth and was as low as 700p in November.

Just yesterday though, the shares rebounded over 10% at one point after the company released its half-year report. Does this represent a turning point in the Wise share price? Let’s take a look to see if I should buy the stock for my portfolio.

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Recent Wise share price weakness

As a quick recap, Wise is a FinTech company that offers cross-border money transfer services. I’ve used the platform myself when converting sterling into both euros and dollars, and thought the service was excellent. The cost for transferring was also competitive.

I think there are two reasons for the recent share price weakness, the first being competition. FinTech is an exciting sector at present. But this means competition will also be hot. Companies must have wide economic moats if they’re to retain market share.

With this in mind, the Wise share price fell a steep 8.5% on one day alone in October. This came after three clearing houses said they were working with major European and US banks to make cross-border payments as fast as domestic equivalents. There are also numerous other FinTech companies vying for position in the currency transfer market, such as Revolut and Equals.

I also think Wise has a steep valuation. The forward price-to-earnings ratio is very high at 131 based on current forecasts. The share price fell almost 7% when the company released its second-quarter trading update in October, even though revenue grew 25% year-on-year. Price reductions also meant its margin on currency transaction volume decreased. I do think that, with such a high valuation, growth will have to remain significant if the share price is to rise from here.

Improving results

In the half-year report yesterday, the company said it now expects revenue growth to be in the mid-to-high 20s on a percentage basis. The previous consensus estimate was for revenue growth of 25%, so this represents a small upgrade on prior forecasts.

There’s been some concern over Wise’s pricing strategy recently as the company has been reducing transfer costs for customers. As mentioned, in the second-quarter update, its revenue generation on total transaction volume had declined. The company now expects this to continue into the second half of the year. However, Wise has been able to reduce its own costs, most notably as the gross margin expanded from 62% to 68%. Together with the upgrade of its revenue forecast, it says to me that Wise’s pricing strategy is working.

Are Wise shares a buy?

I view Wise favourably as a user of its platform. It’s very easy to use, and its pricing is competitive. However, my concern is that it needs to remain competitively priced if it’s to retain market share from other businesses offering very similar services. On top of this is the high valuation that does increase the risk of investment. So I’m not going to buy the shares today. I think there are other growth stocks worth considering first.

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Dan Appleby owns shares of London Stock Exchange. The Motley Fool UK has no position in any of the shares mentioned. 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.

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