As Wise heads towards a potential £5 billion ($7 billion) valuation in its upcoming float, retail investors are asking themselves if this fintech firm is worth a look.
While no specific date is out there, the pencilled-in go-live of May 2021 has now passed, so many now believe that the IPO will take place very soon.
With that in mind, it seems like the perfect time to look into what this company is and, of course, whether to consider investing…
What does Wise do?
Wise, formerly known as TransferWise, is perhaps best known for its online money transfer services. The firm allows people to send money cheaply abroad, offering the real midmarket exchange rate instead of the high exchange rates seen elsewhere and charging a low fee.
For example, sending $1,000 to Europe would cost less than $8 in fees, a saving of $26 versus banks.
The company says it is “up to three times cheaper than PayPal and up to eight times cheaper than banks”.
However, transfers aren’t all that Wise has to offer.
The company also has a multi-currency account, making it easier for people to relocate and allowing them to pay with local currency when shipping online.
In 2020, a $319 million funding round valued Wise, founded by Estonians Kristo Käärmann and Taavet Hinrikus in 2011, at $5 billion.
The UK-based company appointed Goldman Sachs and Morgan Stanley to manage its expected London listing.
Clearly, demand for Wise’s services is high, as the firm has more than 10 million customers right now. Likewise, the financial reports are glowing…
How is Wise performing?
This company doubled its annual pretax profit to £20 million ($28 million) in its financial year ended March 2020 from £10 million the year before. This came as revenue climbed 70% to £303 million ($429 million) from £178 million.
The company processed £67 billion ($95 billion) in customer payments in 2020, jumping from £36 billion in 2019.
The fact that Wise is profitable while operating both in the challenger bank and money transfer spaces suggests a commendable business strategy.
On the money transfer front, Wise’s competitors include MoneyGram (NASDAQ: MGI), PayPal (NASDAQ: PYPL | FRA: 2PP | BMV: PYPL), Western Union (NYSE: WU | FRA: W3U), and others.
MoneyGram’s revenue fell in 2020 to $1.2 billion from $1.3 billion, while it swung to pretax income of $6.1 million from a $64.3 million loss in 2019.
PayPal’s revenue in 2020, meanwhile, rose to $22 billion from $18 billion in 2019, with pretax income rising to $5.1 billion from $3.0 billion.
Challenger bank competitors include Monzo and Starling Bank. Monzo’s revenue rose to £48 million ($68 million) in its financial year ended February 2020 from £20 million in 2019, though its pretax loss widened to £116 million ($164 million) from £51 million.
Starling Bank, meanwhile, posted a pretax loss of £54 million in its 2019 financial year ended November 30, but in November 2020 said it expected to be profitable on a monthly basis going forward. Starling too is eyeing a possible IPO in late 2022 or early 2023.
The perks and problems of IPOs
The trouble with getting in on the ground floor with an IPO is that you don’t yet know how many storeys there will actually be.
Maybe you’ll end up with a skyscraper, but you might also be stuck with a bungalow.
For starters, IPOs are not all that cheap. Indeed, they often follow private investment rounds at increasingly higher prices, before the public shares become available.
These private investors are looking to get more than they put in, so the IPO price is often higher than retail investors realise.
Moreover, by their nature, IPOs carry more risk. It’s one thing to buy shares in a company that has been listed for years, where there’s historic share price data, but that data doesn’t exist for a newly floating company.
However, the greater risk can also mean a greater reward. Just as the lack of previous share price data can mean shares are overpriced at IPO, they can also prove undervalued. For example, shares in Facebook launched at $38 in May 2012 and are now worth close to $330.
Naturally, companies will promote a float. And since they really only get one shot at it, these promotional campaigns can be aggressive. As a result, IPOs can attract the less savvy investors who listen to the sales pitch without looking through the finances as well.
The takeaway, then, is that it pays to do your own research and look at all the information available, not just what the people selling the shares have to say.
The fact that Wise is already making a profit gives it something of an advantage, but for those committed to playing it safe any IPO might seem too risky.
A Wise decision?
Ultimately, every investment is a balance of risk versus reward. Wise’s financials so far are strong, with profit growth and a growing number of payments.
Plus, a customer base of over 10 million indicates the firm offers a popular service.
However, investors must balance this against the risk of any investment combined with the added risks of IPO investing.
Whichever side you come down on, Wish is certainly worth a look.
