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.
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.
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.