Wise shares have slumped. Is this a buying opportunity?

Last year, Wise was a growth stock everyone wanted to own. Today however, it’s a different story. Is now the time to buy shares? Ed Sheldon takes a look.

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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.

Shares in payments company Wise (LSE: WISE) – which listed on the London Stock Exchange in July last year amid great fanfare – have experienced a significant sell-off. At the start of 2022, the Wise share price was near 800p. Today however, it’s at 433p.

So what’s going on with this stock? And, more importantly, has the share price fall created a buying opportunity for me?

Why has Wise’s share price fallen?

In my view, much of the recent share price decline here is down to the FinTech company’s sky-high valuation. When I last covered Wise shares in December, the stock had a forward-looking price-to-earnings (P/E) ratio of about 120, which is very high.

Last year, when interest rates were near zero and central banks were pumping money into the financial system, that valuation may have seemed reasonable to many investors. However today, it’s a different story.

With interest rates rising rapidly (higher interest rates make expensive high-growth stocks less appealing), and central bank liquidity being withdrawn, valuation has become much more of a focus for investors. As a result, expensive technology stocks such as Wise have been dumped across the board.

Should I buy Wise shares now?

As for whether I’d buy Wise shares now, I’m not convinced the risk/reward proposition is attractive yet, even after the big price fall.

Don’t get me wrong, there are things I like about Wise. For a start, I think it offers a brilliant service. I tend to transfer a lot of money back and forth between the UK and Australia using its platform and the service is amazing. I can make a payment from Oz and it will arrive in my UK account within minutes. It’s worth noting that in the final quarter of calendar 2021, 45% of the company’s transfers were instant, which is impressive.

I also like the fact that the company is already profitable. That makes the stock less risky, to my mind.

However, an issue for me is that Wise is set to face plenty of competition from rivals such as PayPal, Remitly, Azimo, XE, OFX, and Currencies Direct in the years ahead. The problem here is that Wise is trying to win customers by lowering its prices. That’s not ideal in an inflationary environment. With costs rising everywhere, I want to invest in companies that can raise their prices.

Meanwhile, the valuation is still quite high, even after the recent share price fall. With analysts pencilling in earnings per share of 8.59p for the year ending 31 March 2023, the forward-looking P/E ratio is about 50. That’s not outrageous, given that earnings are projected to rise 38% this year (giving a price/earnings-to-growth (PEG) ratio of 1.34). However, it doesn’t leave much of a margin of safety.

So, for now, I’m going to leave Wise shares on my watchlist. In the current environment, where valuation is important, I think there are better stocks to buy.

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.

Edward Sheldon owns shares in PayPal Holdings. 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.

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