UK financial technology stock Wise (LSE: WISE) has had a rough few months. After rising to nearly £11 in mid-April, it has slumped to below £8.
Is there value on offer at current levels? I think so – in my view, Wise shares are a bargain today.
The bull case
Looking at this company from an investment perspective, there’s a lot to like. For a start, it offers a really great service for its customers.
I’ve personally been using Wise to transfer money internationally for over a decade now, and I wouldn’t use any other provider today. I’m always amazed at the speed of transfers (when I transfer money from Australia to the UK it arrives in about five seconds), and I’m very happy with the transfer fees (which are negligible).
It’s worth pointing out that Wise operates a ‘scale economies shared’ business model. This means that it’s continually lowering its fees as it gets bigger and more efficient.
This kind of business model is a great way to keep customers locked in. Other companies that have employed it include Amazon and Costco – two of America’s greatest corporate success stories.
Second, it’s a really scalable company. Looking ahead, it has the potential to onboard a ton of new customers, offer existing customers new products, and see growth through B2B deals with other institutions.
Note that while a lot of people use Wise today, it’s really only scratching the surface in terms of its potential. In personal international payments, its market share is only around 5% while in small business transfers, it’s under 1%.
Third, its financials are impressive. Revenue, for example, has grown from £964m to around £1.8bn over the last three years.
Profits have also soared. Note that return on capital employed – a key measure of profitability – is very high.
A setback
Now, like every company, it’s not perfect. And recently, the company has faced some negative press in relation to money laundering.
While Wise takes money laundering very seriously (around a third of its staff is focused on stopping financial crime), it seems criminals in Europe have been using its network for illegal payments recently. As a result, regulators in Brussels are looking into the company (this is what has sent the share price down).
Obviously, this development adds risk to the investment case. However, to me, it sounds like Wise is doing everything it can to stop this kind of activity.
In an update, the company said that it:
- Verifies customers before they open an account
- Continues monitoring hundreds of data points in real time as customers use its products
- Proactively reports suspicious activity to law enforcement
- Offboards customers when needed
- Continually invests in tech-enabled systems and teams to stay ahead of ever-evolving threats
So, I’d be very surprised if the Brussels prosecutor was to hand out a large punishment for a lack of controls. Ultimately, Wise is taking its responsibilities very seriously.
A low valuation
Now, after the recent share price fall, the forward-looking price-to-earnings (P/E) ratio here is only 20. I reckon that’s an attractive valuation given the company’s growth potential and attractive financials.
There are risks around the Brussels investigation (and investor sentiment while it’s ongoing). But taking a three-to-five year view, I see a lot of potential so I think the stock is worth a closer look today.
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Edward Sheldon owns shares in Wise and Amazon.
