The Wise (LSE: WISE) share price crashed by 30% over the past month. After trading at over £11.50 in September, it now trades close to its market debut price of £8. What caused the crash and should I consider buying the shares today? Let’s take a closer look.
Wise share price weakness
Friday’s near 5% share price decline is related to a share shale by co-founder Taavet Hinrikus. He sold 10 million class A shares via his own investment firm OU Notorious.
Insiders such as company founders and directors can sell shares for several reasons. But I prefer to see directors buying more shares in their companies rather than selling them. That said, it’s important to note that Hinrikus still holds 54 million class B shares, retaining ample skin-in-the-game.
Other potential reasons for share price weakness this month could be the threat of rising competition from banks. By disrupting the traditional business model operated by banks, Wise set out with a mission to cheaply and transparently move money across borders. Traditional banks are unlikely to sit back and watch while a competitor tries to ‘eat its lunch’. Rising competition could be why Wise dropped prices faster than it might have liked during the second quarter.
A wise investment?
Despite recent share price weakness, there’s much to like about Wise. It’s a profitable and growing business. Almost 4 million Wise customers transferred £18bn this quarter. That’s 36% more than a year ago. Customer numbers are rising too. Compared with the prior year, this quarter, personal customers grew by 22% and business customers by 44%. These metrics are encouraging.
In addition, revenues grew to £133m. That’s an increase of 25% compared to the prior year. I like growth shares that manage to grow consistently with pace like this.
I also have a preference for companies that innovate to keep ahead of the competition. Wise ticks this box, in my opinion. Since it was founded, it has been innovating to make transfers faster and more convenient. So it’s encouraging to see that 40% of all transfers were instant this quarter. That’s up from 38% in the previous three months. It also added new features for business customers – a smaller but important segment.
Should I buy the shares?
I like this innovative and growing technology business. The future looks promising and it looks like there’s ample potential for Wise to grow further. It has a large global audience and it’s possible that it’s still just scratching the surface. However, there are some points that are holding me back from buying the shares today. I’m concerned about the risk of competition from the much larger banks.
I also think the shares look relatively expensive. Wise trades on a price-to-earnings (P/E) ratio of 122 times. Growth shares often have valuations that look expensive, and I reckon that’s ok as long as they continue to grow rapidly. But it leaves little room for error, in my opinion.
All things considered, I’ve decided not to buy the shares today. However, I’ve put them on my watchlist for now.