The Wise (LSE: WISE) share price is at 997p, and could soon break its first major resistance level of 1,000p.
With an initial listing of 800p, that’s a 25% upside so far for initial investors who bought in at its IPO on 7 July. I think the reason for the 1,000p resistance level is speculators cashing out of their positions. As long-term investors start to make up a larger proportion of shareholders, I think the breakthrough becomes more likely.
With a sky-high price-to earnings (P/E) ratio of 127, are Wise shares worth the risks?
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Profits and growth
Wise’s FY21 results was released just before its IPO. It was full of good news, helping to explain its buoyant share price. CEO and co-founder Kristo Käärmann reported that 3.7m customers are now using Wise, a 28% year-on-year growth for personal customers and 56% growth for business customers.
Revenue was up 39% year-on-year to £421m, while profits more than doubled to £41m. The company expects revenue growth of between 20% and 25% over the next year, maintaining an EBITDA margin of more than 20%.
These are all encouraging numbers, but I think a sense of scale is required to put the Wise shares into perspective. Money Transfer Comparison calculates that more than $2.5qdn dollars flow across borders every year. This unimaginable number leaves Wise with essentially infinite room to grow. It’s also a reminder that to the global financial markets, it’s still a very small fish.
Are Wise shares worth the risk?
PayPal (NASDAQ: PYPL), by comparison, has 305m user accounts, making it one of the largest digital payments firms in the world. With revenue of $21.45bn last year, the company is plugged into eBay and Amazon, along with most other online retail sites. Statista reports that 36% of US retailers already accept PayPal, with 19% of its payment volume being cross-border transactions.
If PayPal chose to reduce money transfer fees to match or even outcompete Wise, I think Wise shares and company itself could be in huge trouble.
Wise is still a new financial technology (FinTech) company. This is an immediate red flag for me. For every PayPal, there’s a hundred companies like Wirecard, Pay By Touch, Simple, Clarity Money, GoBear, Wonga, and Xinja. If you haven’t heard about some of these companies, there’s a reason why. They all failed. And there’s no guarantee that Wise will be any different.
However, if I’d invested £1,000 into PayPal at its IPO in 2002, my shares would now be worth £16,500, a 1,550% return on my investment. And let’s not forget that its IPO came during the fearful atmosphere after the dot-com bubble crash. With a share price of $276 and a market cap of $325bn, I think PayPal is a much stronger competitor.
My bottom line
Wise markets itself on being six times cheaper than traditional banks, with no hidden fees. As a consumer, I can see how this would appeal. There is a chance that it could become the market disruptor that it clearly sees itself as.
But for my money, PayPal is a larger company with fewer risks. It has a price-to earnings ratio of 67, nearly half that of Wise. I think that in the near future, the Wise shares will either rise astronomically, or fall spectacularly. That’s a risk I’m not prepared to take. I’d buy PayPal instead.
