The recent past has not been kind to financial technology and IPO stocks. In the last 12 months, the Renaissance IPO ETF (IPO -1.04%) has been underperforming the S&P 500 by almost 50%, and the S&P 500 is down over 10% in the same time period.
One stock that has gotten hit badly by this sell-off is London-based fintech Wise (WISE -0.12%). The stock price for this global remittance and foreign exchange platform is down nearly 68% since its IPO a little less than a year ago, potentially providing a buying opportunity for long-term investors.
Is it wise (pun intended) to invest in beaten-down IPO Wise right now? Let's take a look.
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Wise specializes in low-cost remittances
Wise operates as a low-cost remittance service for individuals and businesses looking to send money internationally. This has been a lucrative business for companies like Western Union ($5 billion in trailing 12-month revenue) historically. However, Wise is looking to disrupt the industry by offering customers much lower fees for sending money. Typically, these legacy providers charge 3% to 7% in fees on every transaction through their network. Wise, on the other hand, charged an average fee of only 0.61% to move money in the fourth quarter of fiscal year 2022.
This disruptive fee structure has attracted many customers -- both individuals and businesses -- to do international transfers on the Wise network. In fiscal year 2022, Wise's payment volume grew 40% year over year to $92.4 billion, which translated to $680.6 million in revenue, up 33% year over year. Wise is getting great traction from business customers right now, which grew payment volume by 59% last fiscal year. Management estimates that there is almost $11 trillion in annual small and medium business (SMB) cross-border payment volume, of which Wise has a less-than-1% market share. This provides a fantastic long-term opportunity for the company to go after with its lower fee platform.
The goal is more than just money transfers
The No. 1 metric to track for Wise is payment volume, as it will be the key driver of financial success in the near term. But over the long-term, Wise plans not to just power cheap international money transfers but to become a full-fledged international bank for individuals and businesses. It is doing this with two key products: Wise Account and Wise Business.
Wise Account is a mobile payments application for individuals. It allows them to easily convert foreign currencies, send money internationally to other people, and store money in different currencies, and it even has a debit card for spending money from the account. The debit card is the key to user monetization for Wise. The card allows people to spend money anywhere, as long as they have the local currency in their Wise Account. For every dollar that is spent with merchants, debit card companies keep around 2.5% of the transaction. If the Wise Card becomes more popular, this can be a lucrative source of payment volume for shareholders.
As you may have guessed, Wise Business is for business accounts. The service offers all sorts of payment capabilities a company might need but does it seamlessly for cross-border transactions. This includes issuing debit cards, invoices, and many other services. Like the Wise Account, this can embed the Wise platform more deeply into its business customers' lives, creating sticky long-term financial relationships.
Right now, only a few markets have full access to these products, making it a small portion of Wise's business. But there is a long runway to grow these segments as they continue to get rolled out around the globe.
Valuation looks attractive
With a steady stream of new payment volume and these new product lines, Wise's management is confident it can continue growing at a high rate. This fiscal year, it expects to grow revenue by 30% to 35% year over year. At the high end of this guidance, that equates to $919 million in annual revenue. At a 22% adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, which Wise had last year, this would translate to $202 million in annual profit.
Right now, Wise trades at a market cap of $3.6 billion. This gives the stock a forward price-to-earnings (P/E) ratio of 18. Given the huge opportunity ahead for Wise to disrupt the remittance and international money transfer market, I think this is a reasonable price for Wise shareholders to pay if they're looking to hold on for at least a decade.
