On 7 July, Wise (LSE: WISE) went public through a direct listing. Wise shares initially opened at 800p but strong demand from investors has caused the share price to rise 22% to 974p at the time of writing. Will this trend continue and is this a good time to jump in?
One reason Wise has generated a positive reaction among investors is that the company is providing a great service to its customers. Wise facilitates cross-border currency transactions and its mission is to “build money without borders: instant, convenient, transparent and eventually free”. So far, it seems to be successfully working towards this goal. In the last financial year, Wise facilitated £54bn worth of transactions and helped its customers save £1bn. Some 38% of these transactions were also instantaneously processed and 83% were processed within a day.
Wise has also performed well financially over the last three years. Last year, the company grew revenues by 39% to £421m after having achieved revenue growth of 71% the previous year. Unusually for a new listing, it is also profitable. Last year, the company managed to generate a profit of £31m, more than double the profit it generated the prior year. This profitability has no doubt been a key reason why Wise shares have done so well since going public.
And it achieved this growth without taking on too much debt. Currently, the company’s total debt is worth £98m. This is a little over two times the company’s operating profit. To me this is a reasonable amount of debt for a profitable business growing as quickly as this one.
One of the main risks is competition. Currently, it has several competitors offering similar products. One such competitor is MoneyGram which facilitates transactions in 200 countries. This is 24 more countries than Wise. Furthermore, the company faces competition from the traditional banking sector. Wise is seeking to replace the ‘old’ and ‘outdated’ payments system that uses traditional banks. Personally, I can’t see banks simply letting Wise take away customers without doing anything. As such, I think it’s very possible that traditional banks will start to compete aggressively with the company in this space.
Wise is also operating a low-margin business. This is partly due to the competition in the industry and partly due to the company’s commitment to lowering fees. Last year, it achieved a net profit margin of 7.3%. This does not leave much room for a downturn in the market or increased competition in the future.
Another concern of mine is its valuation. Currently, it has a market capitalisation of £9.64bn. This puts Wise shares on a multiple of 311 times earnings. In order for such a multiple to be justified, it would have to grow revenues and earnings very quickly. Management has said it expects revenue growth to decline to around 20% in the medium term. Although this is very decent growth, I do not think it is enough to justify such a high valuation.
For these reasons I have decided not to add Wise shares to my portfolio. However, I will be keeping my eye on the share price just in case it falls to an attractive level.
Ollie Henry has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.