Since Wise (LSE: WISE) shares came to the market in 2021, they’ve been on a wild ride. First, they spiked up above 1,000p. Then, they crashed below 300p.
Recently, however, the share price seems to have stabilised a little. Is now the time to invest in the FinTech company then? Let’s discuss.
Three reasons to buy
Looking at Wise today, I can see reasons to be bullish.
For a start, the company has a great offering. I’ve been transferring money internationally with Wise for many years now, and I’ve always been very impressed with the service.
And clearly, I’m not the only one who likes their platform. In its recent Q4 results, Wise advised that it now has 6.1m customers, 33% more than it had a year earlier.
One area of the business that I think is worth highlighting is business accounts. Today, Wise has more than 340,000 businesses using its platform.
This is notable because I imagine that once businesses are set up on the platform, they are most likely to stick with it (creating recurring revenues) due to the time and hassle associated with switching to another payments provider.
Meanwhile, the company is growing at a rapid rate. Last quarter, revenue came in at £223.5m, up 45% year on year. There are not many large-cap UK-listed companies growing at that rate.
Finally, unlike a lot of other FinTechs, who are losing money hand over fist, Wise is already profitable. This financial year (ending 31 March 2024), it is projected to generate net income of £167m. Generally speaking, profitable companies are less risky from an investment perspective than unprofitable ones.
Three risks to be aware of
Having said all that, there are a few risks to be aware of here.
In Wise’s recent results, it reported a 7% decrease in average volume per customer (i.e., transaction size). It attributed this to the fact that customers who move larger sums, for things like buying property or other investments, have been cutting back. So, there appears to be a ‘cyclical’ element to the business.
Another issue to be aware of is that Wise faces plenty of competition. As a result, it needs to keep its prices low to compete with rivals. This is not ideal as it will keep a lid on profits.
Speaking of profits, Wise’s return on capital is not so high. Last year, it was 9.4%. To put that in perspective, one of my favourite FinTech companies, Alpha Group, had a return on capital of 28.4%. Return on capital is a key driver of investment returns in the long run.
As for the company’s valuation, it is quite high. Currently, analysts expect Wise to generate earnings per share of 15p this financial year. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of 38 today.
My view on Wise
Putting this all together, my view is that Wise shares are a little risky.
There are certainly things to like about the business. However, all things considered, I think there are better growth stocks to buy today.
