On 7 July, the London stock market got a new, directly-listed financial technology (FinTech) stock, Wise (LSE: WISE). And that’s something that doesn’t happen every day.
Wise shares have been flying
The initial market valuation was £8.8bn. And now its market capitalisation is around £13.5bn because the share price has gone up. Wise has proved to be a stock market success, so far.
But can the stock go on from here to become a big success for investors? It’s possible. And the ‘story’ behind the underlying business is certainly an intriguing one. In essence, the directors have ambitions to disrupt and revolutionise the international money transfer market. And the company aims to do that by raising standards in the industry, trimming costs, simplifying the process and selling the product cheaper.
It’s one of the well-used blueprints, for example, of successful entrepreneur Sir Richard Branson. These days, his Virgin Group is involved in more than 400 companies in various fields. And that suggests to me that Wise’s formula has the potential to succeed further.
Despite the impressive size of the company’s market capitalisation, Wise is a young business. Kristo Käärmann and Taavet Hinrikus started the enterprise in January 2011. And with the execution of the stock market listing, these two Estonians are now quite comfortably off when it comes to their personal finances.
Building a new infrastructure network
However, Käärmann still heads the company as its chief executive. And he explained the business model and vision in a video on the firm’s website. In essence, Wise started as an international money transfer service a decade ago. But it’s since expanded to become a “global cross-border payments network.” And the Wise network “replaces” traditional international banking for around 10m personal and business customers.
Käärmann reckons people use the service to send money across borders, get paid in 30 different countries and spend money in 176 countries around the world. And businesses use Wise to help them operate internationally. But, on top of that, banks and enterprises use the Wise Platform to pass on the benefits of the company’s “faster, cheaper” international transfer service to their own customers.
The company said it “spent the last decade” developing its infrastructure to replace the world’s old and outdated system. But Wise’s system continues to evolve. Now, it’s an “ever-expanding” global network of direct and indirect integrations with local payment systems.
Fast growth
In 2021, Wise processed volume worth £54bn, which the firm claims saved its customers around £1bn in fees. And that volume generated £421m of revenue, up by almost 40% compared to 2020. Â
However, profits remain modest compared to its market capitisation. In the trading year to 31 March, Wise achieved a post-tax profit of almost £31m, up from £15m the prior year. That’s an impressive rate of profit growth. But with the share price near 974p, the figures imply an earnings multiple knocking on the door of 400.
To justify a valuation like that, I reckon revenue needs to dump heaps of profit onto the bottom line in the immediate years ahead. And I’m watching from the side lines with interest for the time being.