The last time I covered Wise (LSE:WISE) shares, on 18 October, I said that I was going to leave the FinTech stock on my watchlist, instead of buying it. In hindsight, that was the right move. Over the next month, the Wise share price fell nearly 20%.
Recently however, the shares have shown signs of a recovery, rebounding from a low of 700p on 24 November to 870p on Tuesday (they’ve since pulled back below 750p). So, what’s driving this share price rebound? And is it time for me to buy the stock for my portfolio?
Why Wise’s share price has popped
The main reason the share price has jumped this week is that the market was impressed with the company’s H1 FY22 results, which were posted on Tuesday.
Overall, the results were pretty good. For the half-year ended 30 September, revenue was up 33% to £256.3m while adjusted EBITDA was up 20% to £60.6m. The market liked the fact that gross margin came in at 67.8% versus 62% a year earlier, while free cash flow was up 39% at £59m.
What investors really liked, however, was the full-year guidance. Here, Wise said: “Based on our progress and current outlook for volumes and price drops, we now expect annual revenue growth for FY22 to be mid-to-high 20s on a percentage basis.”
Previously, the group had said that it was expecting revenue growth in the low-to-mid 20s percentage range for the year. So, this guidance increase was a nice surprise for investors.
Should I buy Wise shares now?
As for whether I should buy any of the shares for my portfolio, I’m still not convinced the stock offers an attractive risk/reward proposition, even after the recent share price weakness.
My main concern here is the valuation. At present, City analysts expect Wise to generate earnings of 6.16p per share for the financial year ending 31 March 2022. This means that at the current share price of 746p, the forward-looking price-to-earnings (P/E) ratio is about 121. I think that’s quite expensive relative to the expected revenue growth here. It’s worth noting that analysts at Reuters point out that of its listed peers, only Adyen and Square trade at higher price-to-EBITDA multiples using next year’s EBITDA forecast.
I’ll point out that I’m not against paying a high valuation for a stock if its growth is phenomenal and the company has a competitive advantage. Earlier this week, I actually bought some shares in US FinTech company Upstart for my portfolio, which has a P/E ratio of around 110. However, in the last quarter, its year-on-year revenue growth was 250%, which means it’s growing at a much faster rate than Wise. And I think Upstart’s business model (it provides an artificial intelligence platform for banks to help them lend more efficiently) is harder to replicate than Wise’s business model. So, I can justify the high valuation for the stock.
In Wise’s case, however, I can’t justify paying a P/E ratio of 120+ for the shares. So, once again, I’m going to leave Wise on my watchlist for now.
All things considered, I think there are better growth stocks to buy right now.
