Are Wise shares a good investment following its direct listing?

Dots over the earth connecting the world

Wise (LSE: WISE) shares made their debut last week on the London stock market through a direct listing rather than the traditional Initial Public Offering (IPO). The company is one of the UK’s largest fintech firms and it opted out of raising new capital via an IPO.

According to its website, Wise thinks that this was a “fairer, cheaper and more transparent way” for it to broaden its ownership. So would I buy Wise shares now?

Well, the stock has been listed only a week and I tend to adopt a wait-and-see approach. This is to observe how the shares start trading and are received by the market. I’m going to stick with the strategy and place it on my watch list for now.

An overview

Wise was founded two Estonian friends, Taavet Hinrikus and Kristo Käärmann, in 2011. The firm was born out of frustration as they faced high fees when sending money between the UK and Estonia. The duo founded a company that allows customers to make cross-border money transfers at a cheaper rate and faster than the UK’s leading high-street banks could.

The firm was previously known as TransferWise, but it rebranded to Wise in February 2021. It has grown at a staggering rate over the past decade. It claims it now helps over 10 million people and businesses move over £5bn across borders every month, saving customers more than £1bn in fees each year.

Bull case

What I really like about Wise is that it has come to market as a profitable company. That’s unlike some newly-listed firms that I’ve covered, such as Deliveroo, which have been loss-making. It may seem obvious that a firm should be making profits, but the recent trend has been that unprofitable companies like to go public.

And this profitability isn’t a one-time-only thing. According to its lengthy prospectus, it has been making a profit since 2019. So that’s three financial years of profitability so far. It’s the only information in the document I’ve to go by yet and the profit margins aren’t huge, but it’s a start and encouraging to see from a newly-listed public firm.

I think that Wise has an easy-to-use service and has built a strong reputation in its industry. Customers like transparency and this is one of the values that the company has been built on. Plus it has expanded it products and services, which should help fuel growth in the long term.

Bear case

Competition is fierce in the world of cross-border payments though. Wise has to contend with the likes of MoneyGram and Western Union, as well as PayPal. If it’s only going to compete on price then profitability could be hurt in the long term.

As I said, profit margins are already small. So Wise needs to demonstrate that it’s offering value to customers if it’s going to survive the competition. Especially now that it’s a public company.

Is it a good investment?

I like what the company is doing and that it’s already profitable. But I don’t think Wise shares are a good investment just yet. I think there’s a lot of euphoria surrounding the stock. I normally wait for this to settle down and see what results it releases. But it’s definitely on my list to track closely.

The post Are Wise shares a good investment following its direct listing? appeared first on The Motley Fool UK.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended PayPal Holdings. The Motley Fool UK has recommended the following options: long January 2022 $75 calls on PayPal Holdings. 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.