I think the UK has more quality growth stocks than it gets credit for. And one of its best might be outside the FTSE 100 and the FTSE 250.
The latest results from Wise (LSE:WISE) look good, but the stock is down 9% this mornning (17 July) after the release of its Q1 results. So could this be a buying opportunity?
Business model
Wise is a platform for cross-border payments and transfers with a simple business model. It aims to use economies of scale to provide customers with a service that’s impossible to compete with.
This involves being faster, cheaper, and more reliable than the competition. And in the short term, that means growing as much as possible to achieve the required scale.
Investors therefore need to focus on three things. One is how many users are on the platform, another is how much money they send, and the third is how much Wise charges them.
In Q1, the user base was up 17%, the total payment volume increased by 24%, and Wise’s fees fell from 0.64% to 0.52%. So far, so good, but a closer look reveals some small concerns.
Looking at the details
Underlying income – what Wise uses as a proxy for revenues – grew 11% during the quarter. It’s hard to argue too much with that, but there are a couple of things investors should note.
One is that this was short of the firm’s stated ambition of medium-term growth of between 15% and 20% per year. At constant currency rates, however, the figure is much closer (14%).
Another thing to note is where the growth is coming from. Wise generates its income from two sources – charging fees for cross-border transactions and earning interest on customer deposits.
The first is the core part of the business, but it’s the second that showed the most growth in Q1 (31% vs 24%). This isn’t a problem by itself, but it is worth paying attention to.
Continued strength
In the grand scheme of things, those are some minor details in what I see as a generally strong result. From a long-term perspective, things are clearly moving in the right direction.
One thing that stands out to me is the take rate (the fee Wise charges on transfers) falling from 0.64% to 0.52%. On the face of it, that looks like a negative, but I think it’s the opposite.
Companies lowering prices isn’t generally seen as a sign of competitive strength. But I don’t think Wise is doing it because it has to – I think it’s doing it to widen the gap with its rivals.
This is part of the firm’s long-term strategy. And the continued growth in users, transfers, and deposits indicates to me that it’s working.
Recession risk?
The biggest risk with Wise that I can see is a global recession. And the ongoing trade uncertainty means this is more of a threat at the moment than it has been for some time.
July’s Bank of America Fund Manager Survey suggests the smart money sees this as the biggest risk to the stock market at the moment. So it’s certainly worth taking seriously.
That could disrupt Wise’s growth in the short term. But the long-term outlook still looks very positive and I think investors should consider buying today’s dip.
