The Wise share price: here’s why I’m not keen

This week, another hotly anticipated public listing went live. Wise (LSE:WISE) is a leading fintech company, specialising in foreign exchange (FX) transactions and payments. It’s better known to most of us as TransferWise, but with a recent rebrand, it has dropped the first part of the name. The Wise share price has performed well during the opening days of trading, but ultimately I’m not convinced the shares are a good buy for my portfolio.

A solid track record

Wise operates a fairly simple business model at present. It charges a fee for converting money into different currencies. From 2019 to the latest financial year, this average spread has ranged from 0.65-0.77%. So if I decided to buy $10,000, Wise would generate revenue of around $70. 

The business model relies on high volumes being transacted. So far, these volumes have been headed in the right direction, which is good for the Wise share price. In the year ending March 2021, volume for the year stood at £54.4bn. This came from a mix of retail customers and also some small businesses. 

By dropping the word transfer from the name, Wise is clearly looking to expand the offering going forward. Given all of the financial data it has on clients, it would be relatively easy to move into offering cryptocurrency, stocks, ISAs and other financial products. This could give it a much larger potential revenue stream from existing clients alone.

Wise is also different to some fintech firms in that it has been profitable for several years. This is a big tick in the box for traditional investors like me. I’d much rather invest in a company that has broken even or made money than having to invest on the hope of turning a profit several years down the line.

Caution with the Wise share price

That’s all goos. But for me there’s plenty to be cautious about regarding the stock. Firstly, the average margin made is easily less than 1%. So Wise needs to generate very large volumes in order to grow the business. If FX was a new industry or highly disruptive, then I think this could easily be doable.

Yet FX is a competitive area and is only getting more so. All banks offer this service to clients, as well as plenty of brokers and other fintech companies. Companies like Revolut offer FX cheaper than Wise, and other challenger banks are looking to compete in this space as well. The likes of Starling Bank and others already have the full banking set-up. I feel these companies are only going to eat into the volumes of Wise, instead of the other way around.

Wise could also be worth avoiding due to its dual share structure. My colleague Alan Oscroft mentioned this in an article yesterday. The share structure doesn’t give equal voting rights, meaning the founders have disproportionately large decision-making power. This is legal, but isn’t something I’m a big fan of.

Overall, I’m not keen on the Wise share price at the moment. I acknowledge it’s a profitable and exciting company, but I think the competition in this area is too high for one company to dominate it.

The post The Wise share price: here’s why I’m not keen appeared first on The Motley Fool UK.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.