Whenever I have covered Wise (LSE: WISE) shares this year, I have consistently concluded that the company has tremendous potential.
I believe the group can grab a significant share of the global money transfer market with its low-cost business model. By returning efficiencies to customers in the form of lower costs, it should only reinforce the competitive advantage over its peers.
And it seems this is what has been happening.
Taking market share
According to its results for the six months to the end of September, 3.9m consumers used the platform during the period to transfer a total of £34bn, up 44% year-on-year.
Personal and business customer volumes grew by 39% and 61% to £25.9bn and £8.5bn respectively. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 20% to £60.6m compared to the prior-year period. Profit before tax dropped 6% as costs associated with the company’s IPO hurt its bottom line.
Wise’s profit margins are also coming under pressure. The group’s ‘take rate’ for the period (the percentage of money it receives for each transaction) declined to 0.75% from 0.81% a year earlier.
This is primarily due to the group’s decision to reward customers with lower costs as the business grows. Some investors and analysts might argue that this approach is counterintuitive. If a company is growing, other investors might ask why it should sacrifice profit margins to reward customers.
I think that misses the point. The international money transfer market is highly competitive, and Wise needs to stand out. It can do this by keeping costs as low as possible and returning efficiency gains to consumers with lower prices.
The outlook for Wise shares
This strategy appears to be working, which is why I believe the stock remains undervalued despite its recent performance. Wise still makes up only a fraction of the global money transfer market, giving it massive potential for growth over the next few years. As it is already profitable, the company has the funding required to reinvest back into the enterprise to drive growth and reach more consumers.
Still, as I noted above, the global money transfer market is highly competitive. Wise’s peers are going to be looking for a way to gain an edge over this upstart. They could attack it with even lower costs, or use their size to draw consumers with better marketing programmes.
The company is always going to face challenges like these. I will be keeping an eye on these headwinds as we advance.
Nevertheless, as the global economy returns to growth following a pandemic, I think Wise should continue to prosper. As it grabs market share I think profits will continue to grow, and this should drive a virtuous cycle, leading to lower costs for consumers and higher transaction volumes.
I think the company’s growth story is only just getting started. As such, I would continue to buy the stock.
