Wise share price is recovering but PayPal-like concerns remain

Wise (LON: WISE) share price has bounced back after bottoming at 647p in June. It has bounced back by 21%, moving into a technical bull market although it remains sharply below the year-to-date high of 998p. 

Good company with strong growth

Wise PLC is one of the UK’s biggest and most successful fintech brands. It was started as a simple remittance-focused company, helping people to move money around the world.

Wise’s goal has always been to simplify and improve the transparency of the remittances industry. It still has some of the lowest money transfer costs in the industry. 

The company has also added more solutions into its ecosystem. For example, it was among the first companies to offer international bank accounts to its customers. In its platform, one can create a multi-currency trade easily. 

These accounts have become popular among users in the past few years, especially as the concept of remote work has improved. Many companies have also embraced Wise as their payments infrastructure provider.

The most recent results showed that its business customers rose by 20% in FY24 to 600k from 500k in the previous year. 

Altogether, Wise is now more than a money transfer company but a whole payment ecosystem. Its customer balances have jumped from £3.7 billion in FY21 to over £13.3 billion in FY24. similarly. Its assets under custody have moved from zero to £2.9 billion in the same period.

Wise is also growing in other areas. The most recent results showed that its number of customers jumped to 12.8 million while the amount of money they moved rose to £118 billion. 

Wise is growing and becoming more profitable

Unlike most companies in the fintech industry, Wise is combining growth and profitability. In most cases, similar companies experience fast growth at the expense of profitability. 

Wise spent many years without generating profits but it has started to turn the tide. The most recent financial results showed that the company’s profit for the year rose by 212% to £354 million. That growth made it one of the fastest-growing companies in the UK.

Most of these profits came from the interest that the company receives from customer deposits. Ots interest income above the first 1% rose by 302% to £364 million while benefits paid were £124 million. 

These numbers show how the company’s diversification has helped it to become profitable. However, the risk is that its interest income will drop as the Bank of England (BoE) and other central banks start cutting rates this year. 

Wise believes that it has more room to grow over time. The management expects that its income growth will have a CAGR of between 15% and 20%, which is a good number for a company like Wise.

Wise has several catalysts

Wise PLC has numerous catalysts that could push it higher in the longer term. First, it is a quality company where customers remain for a long time. As shown below, many customers tend to continue its services for a long time after sign up.

Second, Wise will benefit from the ongoing migration trends. Most developed world countries are seeing more migration from developing countries and emerging markets. The US has added over 10 million people in the past few years. 

Not all migrants will use Wise for their money transfer needs since the industry is highly competitive. However, many of these people will become customers in the long term, which will benefit Wise.

Third, the company has room to add more services in its ecosystem. For example, it has teamed with Interactive Brokers, one of the top stock exchanges to launch a stocks trading platform. The partnership enables Interactive Brokers’ customers to select the Pay with Wise option. 

Wise has more room to introduce more solutions as we have seen with other similar companies. For example, some of them have introduced stocks and crypto trading tools, helping users buy and sell assets. 

Further, Wise has a chance to increase the solutions offered to business customers who tend to handle more volume. 

Key concerns about Wise stock

Still, a key concern for Wise as an investment is that it seems to be highly overvalued. The company has a market cap of over £8 billion and annual profits of £354 million. That valuation metric gives it a price-to-earnings ratio of 22.5, which is quite big. 

However, I believe that this premium valuation can be justified by its strong revenue and profitability growth.

The other risk is that the payment industry is highly competitive. Some of the top competitors are firms like Apple, Google, Revolut, Payoneer, Remitly, HSBC’s Zing, and PayPal. This competition will likely limit its growth trajectory. This competition, as we have seen with PayPal, could affect its margins. Just last month, the company announced that it planned to spend more money to attract more customers.

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