The Wise (LSE:WISE) share price surged a solid 10% on its first trading day last week. The fintech company joined the London Stock Exchange via a direct listing at a valuation of £8.75bn. This actually makes it the largest-ever public listing of a UK technology business. And today its market capitalisation is closer to £13.5bn.
So, what does Wise do? And should I be considering this newly minted public company for my portfolio?
Moving money worldwide
Wise (or TransferWise as it was formerly known) provides international money transfer solutions for individuals. Typically, when performing such transactions through a bank or foreign exchange dealers, there comes an enormous processing fee. But with Wise, transfers are not only on average seven times cheaper but also significantly faster. According to the company, 83% of all transactions are completed within 24 hours and 38% instantly.
As someone who often sends money abroad, that sounds quite impressive to me. So how does it work? Instead of transferring funds directly from one bank account to another, Wise uses a network of payment processors. These include Visa and Mastercard that process, authenticate, and approve transactions within seconds.
Given this new transfer structure is significantly more efficient than an archaic wire transfer, I’m not surprised to see the company’s platform attract more than 10 million users. This, in turn, has enabled Wise to generate £421m in revenue between March 2020 and 2021. And not only that, unlike many young fintech companies in the space, this one is actually profitable.
With an operating income of £44.9m, Wise works at a margin of around 11%. That’s certainly not fantastic. But it’s worth noting that it seems the majority of the firm’s expenses are fixed. Meaning as the number of users grow, margins should improve, pushing the share price even higher. At least, that’s what I would expect.
The Wise share price has its risks
As you may have already realised, a £13.5bn valuation for a company that just about makes £45m in underlying profits is quite a lofty figure. But that’s often the case with potentially high-flying tech stocks. It’s trying to revolutionise international transfers, after all.
However, there are some risks related to the way it operates. Specifically, its complete dependence on third-party companies to process transactions. Given that the firm will struggle to function without these other businesses, it doesn’t have much bargaining power to negotiate fees. Not to mention, should a relationship turn sour, it could cause significant disruption to its products and services. This, in turn, would likely push users towards a competitor. Needless to say, if Wise’s user numbers fall at this early stage, it would probably send its share price plummeting.
The bottom line
Overall, I’m not entirely convinced by the investment case, at least not yet. Wise has a monumental amount of competition in this space. What’s more, most of its rivals operate with similar technologies. To me, that indicates the barriers to entry aren’t that high, and that fee pricing power is near non-existent.
Its user base seems too small in my eyes to solidify its position within the fintech world. And so, for now, the company is staying on my watchlist until it can boost those numbers.
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Zaven Boyrazian owns shares of Mastercard. The Motley Fool UK owns shares of and has recommended Mastercard. 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.