Financial technology -- otherwise known as fintech -- is a broad category of companies trying to apply technology to the financial industry. With the rise of cashless and internet-enabled payments over the past few decades, the fintech market has grown rapidly. Long-term investors in stocks like Visa and Mastercard have gotten phenomenal returns, with both stocks up more than 500% in the last 10 years.
But where can investors go for the next Visa or Mastercard? I think one candidate is Wise (WISE -0.04%), a U.S.-based digital remittance and international banking company. Here's why Wise is a must-own if you want to invest in disruptive fintech stocks.
Impressive Q1 earnings
Wise (previously known as TransferWise) helps people and businesses move money internationally. Wise charges much lower fees for international money transfers than legacy players, and all transactions can be done seamlessly from a smartphone or web browser. This disruptive pricing and speed give Wise a competitive advantage versus older companies like Western Union.
The proof is in the pudding. In the first quarter of fiscal year 2023 (the three months ended in June), Wise's total payment volume rose 49% year over year to $28.8 billion. On this volume, its average take-rate was just 0.61%, much lower than the 3% or higher fees that other remittance companies might charge. And for the first time ever, over 50% of Wise's transfers were completed instantly, helping again to improve the customer experience versus competitors.
Revenue for the quarter was $223 million, up 51% year over year. Revenue grew faster than payment volume because of the new products Wise has released, like its debit card, which helps earn more money from its existing customers. Since companies like Wise that are based in the U.K. are not required to post their financials quarterly, Wise did disclose how much in profit or free cash flow it generated in the latest quarter. However, the company has had positive earnings per share (EPS) every year for the past three years, so it is likely that continued for the last three months.
Huge long-term opportunity
Wise expects to increase revenue by 30% to 35% in fiscal year 2023 and more than 20% a year for the medium term (if you're wondering how long the medium term is, Wise does not disclose that). Why is Wise so confident it can grow so quickly? Because there is still such a large international payments market for the company to go after.
In 2021, it was estimated there was $26.7 trillion in cross-border payments volume that will grow to $34.1 trillion in 2027. With "only" $91 billion in cross-border payments volume processed last fiscal year, that gives Wise a 3.4% market share of a growing industry. If it can increase volume at a high double-digit rate, lower fees, and continue to add new products like the Wise debit card, I think it is probable that Wise revenue will rise by 20% or more annually for at least the next five years.
But what about the valuation?
As of this writing, Wise has a market cap of $6.2 billion. In fiscal year 2022, the last time it gave investors audited financials, the company generated $136 million in free cash flow on $671 million in revenue. That gives it a free cash flow margin of 20%. At the current price, Wise trades at a trailing price-to-free cash flow (P/FCF) of 38. If revenue can grow at 30% this year and then 20% for the next four years, along with an expansion of free cash flow margins to 25%, Wise will be generating $452 million in free cash flow five years from now. These are lofty targets, but if achieved, the stock will trade at a P/FCF of 11.4 at current prices.
The stock looks expensive at the moment. But if you are willing to hold onto shares for a decade or longer, Wise has the opportunity to put up Visa- or Mastercard-like returns for your portfolio.