In early trading today (12 October), the Wise (LSE:WISE) share price is up 4%. This is largely thanks to a very strong trading update that was just released. With the growth stock only up 8% over the past year, I think some have been impatient on waiting for a large rally.
Here’s why I believe we’re getting close to seeing it soar.
Readjusting for higher earnings
Growth stocks typically trade with a high price-to-earnings (P/E) ratio as investors are conscious of the potential for earnings growth further down the line. That’s one reason why the Wise P/E ratio is currently at 62.
However, the latest results showed that revenue grew by 22% with income up by a whopping 51% versus the same quarter last year. Given the strong projection, I wouldn’t be surprised if the earnings per share jumps by around 50% versus last year.
If this is the case, then the P/E ratio will drop when the full-year results come out, as the updated earnings per share figure will be used. From my calculations, it could drop from 62 to around 40.
Even though 40 isn’t cheap, I think for a stock like Wise the ratio should be higher. The way this could happen is for the share price to rally.
Fuelling China growth
In the update, it mentioned that “this quarter we launched a new service in China, enabling expatriates to send their salaries back home”.
This could be a huge area of expansion for the company in the coming years. What also makes this even more exciting is that the barriers to entry for payment and banking licenses in China is high. This means Wise won’t have much competition with other UK firms.
We’ll have to wait and see the size of this opportunity, but I’ve got a feeling this could be large. If so, then the share price should jump as more investors realise this.
Earning from sitting on cash
Like other financial services firms, Wise earns interest on the client funds being held. Yet because a lot of what the business does is related to foreign currency payments, users don’t usually expect to get paid interest on cash.
So as account balances rose by 33% year-on-year, the gross yield being made has risen to 3.8%. Wise does pay on average 1% to clients. But this is still allowing the business to make a healthy margin on cash.
Given the chances of interest rates staying higher for longer, this could turn into a valuable source of revenue. The boost to income should help to increase the share price.
The bottom line
As a risk, the FinTech sector is very competitive. Excluding the China market, Wise has a huge competition in the general foreign exchange and digital payment space. It’s also going to be reliant on traditional banks to provide the back-end servicing and support network.
Even with this being the case, I feel the Wise share price has strong potential to move higher over the coming year.
