Is it wise to invest in this depressed Fintech IPO?

Lately, it has not been kind to financial technology and stock exchange shares. During the last 12 months have Renaissance IPO ETF (IPO 2.52%) has underperformed S&P 500 by almost 50%, and the S&P 500 is down over 10% in the same time period.

One stock that has been hit hard by this sale is London-based fintech Wise (WISE 0.67%). The share price of this global transfer and currency platform has fallen by almost 68% since the listing a little less than a year ago, which potentially provides a buying opportunity for long-term investors.

Is it wise (pun intended) to invest in the downtrodden IPO Wise right now? Let’s take a look.

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Wise specializes in affordable money transfers

Wise works as an affordable money transfer service for individuals and companies who want to send money internationally. This has been a lucrative business for companies like Western Union ($ 5 billion in subsequent 12-month revenue) historically. However, Wise is looking to disrupt the industry by offering customers much lower fees for sending money. Typically, these older providers charge 3% to 7% in fees for each transaction through their network. Wise, on the other hand, charged an average fee of just 0.61% for moving money in the fourth quarter of the 2022 fiscal year.

This disruptive fee structure has attracted many customers – both individuals and businesses – to make international transfers on the Wise network. In fiscal year 2022, Wise’s payment volume grew by 40% year-over-year to $ 92.4 billion, equivalent to $ 680.6 million in revenue, up 33% year-over-year. Wise is getting a lot of traction from corporate customers right now, which increased the payment volume by 59% last financial year. Management estimates that there are nearly $ 11 trillion in annual small and medium-sized enterprises (SMEs) cross-border payment volumes, of which Wise has a market share of less than 1%. This provides a fantastic long-term opportunity for the company to go with its lower tax platform.

The goal is more than just money transfers

The No. 1 calculation to track for Wise is payment volume, as it will be the key driver for financial success in the short term. But in the long run, Wise plans not only to operate cheap international money transfers, but to become a full-fledged international bank for individuals and companies. It does this with two key products: Wise Account and Wise Business.

Wise Account is a mobile payment application for individuals. It allows them to easily convert foreign currency, send money internationally to other people and store money in different currencies, and it even has a debit card to use money from the account. The debit card is the key to user revenue generation 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 spent with merchants, debit card companies keep about 2.5% of the transaction. If the Wise Card becomes more popular, this could be a lucrative source of payment volume for shareholders.

As you may have guessed, Wise Business is for corporate accounts. The service offers all kinds of payment options a company may need, but does so seamlessly for cross-border transactions. This includes issuing debit cards, invoices and many other services. Like the Wise account, this can build the Wise platform deeper into the lives of corporate customers, creating sticky long-term financial relationships.

Right now, only a few markets have full access to these products, making it a small part of Wise’s business. But there is a long runway to grow these segments as they continue to be rolled out across the globe.

Valuation looks attractive

With a steady stream of new payment volumes and these new product lines, Wise’s management is confident that it can continue to grow at a rapid pace. This financial year, it expects to increase revenues by 30% to 35% year over year. At the high end of this guide, it equates to $ 919 million in annual revenue. With a 22% adjusted profit before interest, taxes, depreciation and amortization (EBITDA) margin, which Wise had last year, this would translate into $ 202 million in annual profit.

Right now, Wise is trading at a market value of $ 3.6 billion. This gives the stock a forward price-to-earnings (P / E) ratio of 18. Given the enormous opportunity that lies ahead for Wise to disrupt the money transfer market and the international money transfer market, I think this is a reasonable price for Wise shareholders to pay if they look to keep on for at least a decade.