FinTech Wise (LSE: WISE) has seen its share price rise by 10% since the foreign exchange specialist joined the London market on 7 July. At around 970p, Wise shares are now priced at a staggering 400 times last year’s earnings.
Normally, I’d dismiss this as a crazy valuation that’s likely to disappoint. But I can see a lot to like in Wise. Here’s why I’m so keen on this fast-growing business.
Can Wise keep growing?
When I look at a newly-listed company, I start by asking if the business still has plenty of growth potential.
With Wise, I’m fairly sure the answer is yes. Wise handled £54bn of international money transfers last year, an increase of 30% in one year. But although that’s a lot of money, it’s a drop in the ocean compared to the overall size of the market. According to Wise, £18trn is moved between countries each year.
Wise is cheaper than traditional banks too. The company says it charges an average fee of 0.7%, compared to 3-7% at the big banks.
One further attraction is that Wise offers a fast, easy-to-use online service. Customers can simply do what they need to do, with no hassle.
In my view, this service has all the ingredients needed for long-term growth. I’m not surprised Wise’s share price has performed well during its first few days on the market.
Strong financial performance
During the year to 31 March, Wise’s revenue rose by 39% to £421m. Operating profit for the same period rose by 90% to £45m. This gives an operating margin of 10.7%, up from 7.8% the previous year.
I’m pleased to see the company’s profitability improving as it expands. This tells me that Wise is benefiting from its larger scale. This could help to drive share price growth.
Looking ahead, management expect revenue to rise by about 20% each year. Profitability is expected to be stable, as the company invests in growth and keeps its fees as low as possible. I’m confident that Wise should be able to deliver revenue and profit growth for many years to come.
However, one possible concern is that the company’s presence in the business market is still pretty small. Globally, businesses account for nearly 90% of all international money transfers.
But Wise’s business customers only generated 20% of its revenue last year, transferring an average of just £40,400. This tells me that most business customers are probably only small enterprises.
Attracting larger business customers could boost growth. But I suspect further investment will be needed to achieve this.
Wise share price: too high already?
Even the best investment in the world is only a good buy if the price is right. I’m not sure that’s true with Wise. The company’s stock market listing has valued the business at £13.3bn. Based on last year’s profit of £31m, that values the stock at 400 times earnings. That’s a bit high for me.
Even if growth stays on track, I reckon it could take at least five years for Wise’s valuation to fall to a level where I’d consider buying.
Right now, Wise shares just look too expensive to me. But I can see a lot to like about this business and will be watching with interest. Wise is certainly a company I’d like to own at the right price.
