Wise shows once again why it is a must-own for disruptive Fintech investors

Financial technology – otherwise known as fintech – is a broad category of companies that try to use technology for the financial industry. With the rise of cashless and internet-enabled payments in recent decades, the fintech market has grown rapidly. Long-term investors in stocks that Visa and MasterCard have had phenomenal returns, with both stocks up more than 500% over the past 10 years.

But where can investors go for their next Visa or Mastercard? I think one candidate is Wise (WISE -2.03%), a US-based digital money transfer and international banking company. Here’s why Wise is a must-own if you’re looking to invest in disruptive fintech stocks.

Impressive Q1 earnings

V data by YCharts

Wise (formerly known as TransferWise) helps people and businesses move money internationally. Wise charges much lower fees for international money transfers than older players, and all transactions can be done seamlessly from a smartphone or web browser. This disruptive pricing and speed gives Wise a competitive edge compared to older companies that Western Union.

The proof is in the pudding. In the first quarter of fiscal 2023 (the three months ended in June), Wise’s total payment volume increased 49% year-over-year to $28.8 billion. On this volume, the average acceptance rate was just 0.61%, much lower than the 3% or higher fees that other money transfer companies may charge. And for the first time ever, over 50% of Wise’s transfers were completed instantly, which in turn helped improve the customer experience compared to competitors.

Revenue for the quarter was $223 million, up 51% year over year. Revenue grew faster than payment volume due to the new products Wise has released, such as the debit card, which helps earn more money from existing customers. Since companies like UK-based Wise are not required to release their financial reports quarterly, Wise disclosed how much in profit or free cash flow it generated in the most recent quarter. However, the company has had positive earnings per share (EPS) every year for the past three years, so it’s likely that continued for the past three months.

Great long-term opportunity

Wise expects to grow revenue by 30% to 35% in fiscal 2023 and more than 20% a year in the medium term (if you’re wondering how long the medium term is, Wise isn’t disclosing). Why is Wise so confident it can grow so quickly? Because there is still such a large international payment market for the company to go after.

In 2021, it was estimated that there was $26.7 trillion in cross-border payment volume that will grow to $34.1 trillion in 2027. With “only” $91 billion in cross-border payment volume processed last fiscal year, that gives Wise a market share of 3, 4% of a growing industry. If it can grow volume at a high double-digit rate, lower fees, and continue to add new products like the Wise debit card, I think it’s likely Wise revenue will grow 20% or more annually for at least the next five years.

But what about the valuation?

As of this writing, Wise has a market capitalization of $6.2 billion. In fiscal 2022, the last time it provided investors with audited financials, the company generated $136 million in free cash flow on $671 million in revenue. This gives it a free cash flow margin of 20%. At today’s price, Wise trades at a trailing price-to-free cash flow (P/FCF) of 38. If earnings can grow 30% this year and then 20% for the next four years, along with an expansion of free cash flow margins to 25 %, Wise will generate $452 million in free cash flow in five years. These are lofty targets, but if achieved, the stock would trade at a P/FCF of 11.4 at current prices.

The stock looks expensive at the moment. But if you’re willing to hold stocks for a decade or longer, Wise has the ability to set up Visa or Mastercard-like returns for your portfolio.