Last month, fintech (financial technology) firm Wise (LSE:WISE) made its highly-anticipated debut on the market. Listed at 800p, Wise shares have shot nearly 25% higher in just four weeks. For early investors, that’s a great start.
However, as with any new listing, ‘price discovery’ is likely to create some volatility, at least in the near term. The question of whether to buy Wise shares in August is one I’m pondering right now.
One thing is certain — more visibility regarding this company’s growth trajectory is set to come with its upcoming earnings reports. For now, looking at the prospectus and initial filings is all I have to work with.
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Accordingly, I’m going to take a look at its business model and recent financials to get a better picture.
Wise shares: intriguing risk-reward
Online banking and digital wallet stocks are all the rage these days. Companies that facilitate the cross-border transfer of money fuel the international economic ecosystem. Accordingly, I’m looking for the potential fintech superstars of tomorrow. That is to say, the companies with the ability to take market share away from larger institutional banking incumbents.
In this regard, Wise certainly looks intriguing to me. I think companies such as this that offer low-fee services alongside quality execution and a customer-first focus are likely to thrive. There’s no reason to believe that banking can’t be disrupted. Like any centuries-old business segment, eventually something smaller comes along that can do the same thing cheaper and more effectively. Such is the case with Wise.
This is a company with a business model I think could be poised for impressive growth over the medium-to-long term. The company’s FY21 annual results highlighted the growth potential of the firm. Revenue increased 39% year-on-year to £421m. Profits came in at £41m, which is notable given the unprofitable nature of so many fintech listings recently. And the company’s EBITDA margin of 26% is certainly attractive to me.
From a numbers perspective, this is a company that (at least on paper) looks like a great fit as a growth play for my portfolio. However, there are risks.
Valuation certainly rich
Wise shares aren’t cheap. On a price-to-sales basis, the company appears expensive. Given Monday’s market capitalisation of £9.8bn, The shares trade at a price-sales multiple of roughly 23. That’s an incredible valuation for any company operating in the financial services space.
From a backwards-looking fundamentals perspective, Wise shares don’t appeal to me. Indeed, most companies trading at these sorts of valuations don’t make my watch list.
However, this is more of a technology company than a financial services play. Accordingly, I’m willing to look at this stock differently. If the company can continue to grow its top line in the 40% range for the next five years, perhaps the case can be made that these shares can grow into their valuation. Indeed, given the total addressable market Wise is pursuing, I don’t find this argument all that far-fetched.
Bottom line
In my view, the shares are certainly valued aggressively today. On the one hand, this is a difficult stock to make the case to own right now. However, on the other hand, it’s also a company with great long-term growth potential.
Accordingly, given my long-term investing time horizon, I’m considering buying Wise shares at these levels.
