Shares in UK payment platform Wise (LSE:WISE) have fallen 22% from their 52-week highs. But the firm’s most recent trading update shows strong growth in revenues, profits and customers.
The company’s voting structure means it isn’t a member of the FTSE 100 or the FTSE 250, despite a market-cap of £8bn. So is there an opportunity going under the radar of most investors here?
What is Wise?
It’s unusual to see a company’s stock falling while the business is doing well. This is usually found in the likes of British American Tobacco, where there are doubts about the firm’s long-term viability.
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Wise is no melting ice cube though. Formerly known as TransferWise, the company’s a platform that allows students, expats and businesses to send money overseas – sort of.
The clever bit is that the funds don’t actually travel. If I want to send money to someone in Australia, I make a payment to Wise’s UK account and its Australian account transfers the money to my aunt.
Moving money internationally with Wise is easier, cheaper and faster than a bank. So the company has the kind of differentiated business that makes for a good investment.
Growth
In its most recent trading update, Wise reported 24% revenue growth, 36% income growth and a 29% increase in active customers. That sounds pretty good – so why has the stock been falling?
A closer look at where that growth’s coming from reveals the answer. Income might have increased by £101.7m, but this included £48m in interest Wise collected on deposits held in customer accounts.
There’s nothing intrinsically wrong with that, but that income is likely to drop if interest rates get cut – which seems probable. And the company’s growth looks less spectacular without it.
Without the £48m Wise collected in interest, the company’s income grew by around £52.7m, or 24%. That’s strong, but arguably not incredible for a stock trading at a price-to-earnings (P/E) ratio of 38.
Buy the dip?
I think Wise is an unusually good business. In a growing industry, its differentiated product offers clear value to its customers and this is enhanced as the company expands its global reach.
The only question mark, in my mind, concerns valuation. The firm has a market-cap of £8.25bn, but the underlying business has never generated more than £300m in operating income.
Wise is undeniably growing, but it has some way to go before it’s in a position to offer a meaningful return for its investors. And with interest rates above 5%, there’s a cost to having to wait around.
That makes the stock a risky investment. The business is impressive, but a good amount of optimism looks to be priced into the stock at the moment, even after the recent decline.
Past the headlines
A company’s share price going down while its business grows makes the stock better value. And while there’s a lot to like about Wise, investors need to look past the headlines.
While an increase in interest income’s attractive, it’s unlikely to be durable if interest rates come down. And with the rest of the business growing less rapidly, the stock still looks expensive.
