As the City says ‘sell’ should I avoid Wise shares?

Wise shares still look attractive considering their potential, despite the City’s view that the stock looks expensive at current levels.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bus waiting in front of the London Stock Exchange on a sunny day.

Image source: Getty Images

Wise (LSE: WISE) shares have been under pressure recently after analysts at Citigroup recommended that its clients sell the shares

According to the investment bank, shares in the money transfer business are priced for “excessive long-term growth expectations“.

Their analysis shows that the company would have to achieve a revenue growth rate of 20% per annum for the next eight years to justify its current valuation. As such, the reports suggest that the stock could underperform the rest of the market if it fails to meet these lofty expectations. 

Put simply, it seems as if Citi’s analysts believe the stock is expensive. I am not so sure. Yes, Wise shares might look a bit pricey, but I think it would be a mistake to suggest that the business cannot grow rapidly over the next few years. 

Growth potential

As I have mentioned in the past, Wise has tremendous growth potential. Currently, the company only accounts for a fraction of the global foreign exchange market, and customer numbers are growing every day. 

What’s more, unlike other businesses in the space, the group rewards its customers with lower prices. It continually reduces the amount of money it takes off the top of each transaction as the business grows. This provides better value for consumers and encourages customer loyalty in a highly competitive and commoditised market. 

That being said, Wise shares do appear expensive. Even after recent declines, the stock is trading at a forward price-to-earnings (P/E) multiple of 99.5. The ratio will fall to 76 by 2023, with further earnings growth on the cards. 

This valuation does not leave much room for error. It suggests that the market is expecting a lot from the company. If it fails to meet these lofty group expectations, investors could quickly turn their backs on the enterprise. 

The biggest risk facing it is the threat of competition, I feel. Companies like Western Union and PayPal are larger and far more established. This gives them much more financial firepower to compete with smaller outfits like Wise. 

Still, Wise does have a competitive edge. It is cheaper and more customer-focused. These qualities should help the business fend off threats from larger competitors. They may also help the company outperform the rest of the payments market, supporting its current valuation. 

The outlook for Wise shares

Overall, I think it is worth considering Citi’s opinion of the money transfer business. The stock does look expensive, and the market seems to be expecting a lot from the corporation over the next couple of years. 

Nevertheless, I believe the company has tremendous growth potential, and its unique business model should continue to attract consumers. As such, I am still happy to buy the shares for my portfolio as a long-term growth investment. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 of the best stocks to buy now with £500

I think that Berkshire Hathaway and Activision Blizzard are two of the best shares to buy today. I think they…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I bought 10 cheap shares. Here’s what happened next

After recent price falls, we bought 10 cheap shares for extra passive income in future. This mini-portfolio offers a tasty…

Read more »

Close up view of Electric Car charging and field background
Investing Articles

Is now a good time to buy Chinese EV stocks as economic growth slows?

Chinese EV stocks tend to trade at a considerable discount to their US counterparts. And that's one reason I like…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

I’d happily start investing in today’s stock market – here’s why

The stock market has been moving up even as the economy has been looking shakier. Would our writer start investing…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 22% in a month! This FTSE 100 takeover target could rise further

A takeover bid for an FTSE 100 firm is big news. Here's what I'm doing about RS Group shares after…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Income shares could help me turn £300 into £500. Here’s how

Our writer believes investing in the right income shares over the long term could be lucrative. Here is his approach.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I bought these FTSE 250 shares for fat dividends!

These two FTSE 250 shares have gained in value since I bought them recently. But I still see these stocks…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Should I buy this REIT to add to the others that pay me juicy dividends?

Jabran Khan looks closer at this real estate investment trust (REIT) and decides if he would add the shares to…

Read more »