Wise offers a service that’s widely appreciated, in increasing demand, profitable and better than the competition. In many ways, it ticks all the right boxes.
The share price, however, tells a different story. The money transfer platform is worth about 25 per cent less than when it debuted on the London Stock Exchange in 2021. This underperformance serves as a reminder that IPO valuations are often too frothy and that investing in growth stocks can be a bumpy ride.
Wise’s main selling point has always been making it quicker, more transparent and cheaper for people and businesses to move money around the world. An obsession with keeping prices as low as possible has won it lots of business and scared investors, some of which are worried about an over-reliance on consistently increasing volumes to drive growth. It has also refuelled the old debate that what’s great for punters isn’t always great for shareholders.
Another source of anxiety is competition. When disruptors step on to the scene with a great idea, it’s likely that others will follow suit and that the big boys whose lunch is getting eaten will fight back. That, on top of a lofty rating characteristic of companies with high growth prospects, explains why the slightest hint of a setback, such as a recent fall in average transaction sizes per customer, makes investors so jittery.
Some of these fears appear to be exaggerated. A dip in big ticket transactions in today’s economic environment shouldn’t be so alarming. Wise, despite all the noise, isn’t about to eradicate all fees. Management knows it has shareholders to please and has pledged to maintain an adjusted cash profit margin of at least 20 per cent, which isn’t too shabby and should keep all parties happy. Competition is a more credible threat. Wise’s 12 years in the game have given it the infrastructure to send funds quickly and cheaply while generating decent profits. The small handful that compete on price are generally slower, less highly rated or losing money. They do exist, though, and are growing in number, which could be a problem.
Big banks are less menacing. They earn the majority of their revenues from lending and are unlikely to bother revolutionising how they do business at a great expense for what to them is small potatoes. Some of them have decided to join forces instead, using a white-label money transfer service provided by Wise.
That’s just one of many potential revenue drivers. It feels that Wise has been around for ages, yet high street banks, who tend to charge at least 4 per cent more to transfer money, still dominate the market. In Asia Pacific, North America and the small businesses sector, markets that all represent much bigger growth opportunities, the company is just getting started.
The golden question is whether Wise can deliver on all this promise, particularly with so many rivals nipping at its heels, and whether the current price reflects this. The fact that it is established, profitable and has few directly comparable listed peers means the best way to value the money transfer group is against itself. It scores well in that regard, trading at about half its usual price to forecast earnings and 40 per cent less than its customary total enterprise value to future ebitda.
Wise’s stellar track record and growth potential make it a tempting proposition at this price. But it’s hard to ignore the risk that the opportunities baked into the shares could be gobbled up by someone else. There’s little loyalty in the money transfer business. If something cheaper and better comes along, customers probably won’t have any problem jumping ship. Unless you are feeling particularly confident, it might be wise to stay neutral.
ADVICE Hold
WHY Wise has a lot going for it but competition is a real threat
Moonpig
Moonpig’s first few years as a public company have been a rollercoaster. The online card and gift retailer listed in February 2021 when high streets were shut by the pandemic and internet sales were booming. Everything has pretty much gone downhill since.
The company is worth about 60 per cent less than its floating price and yet remains one of London’s most shorted stocks. That is a real slap in the face and has left the shares trading at 12 times forward earnings, significantly less than the multiple of 42 that was recorded at the time of the retailer’s initial public offering.
Moonpig is essentially a play on the British and Dutch penchant for sending greetings cards and the shift to buying them online. When customers place orders, their data is collected and used to encourage repeat purchases and sell them relevant gifts to go with their cards. This business model appears to be working and enables Moonpig to leverage its costs and boost revenues and margins.
Management is confident that a continuing trend towards online sales, where the company controls 70 per cent of the market, coupled with its unique range of cards that can be personalised, customer pull and gift upselling, will deliver plenty of growth for years to come.
The current medium-term goal for Moonpig is for underlying revenues to grow in the mid-teen percentages and for adjusted ebitda margins to rise slightly to between 25 and 26 per cent.
Those are nice targets but investors will need greater reassurances that they can be met, particularly given the state of the economy and the fact that bricks and mortar competitors are getting better at selling cards online.
Moonpig, a renowned big spender, has promised to prioritise profitability over chasing growth in the near-term and to focus on flogging more of its value gift range.
However, a bigger catalyst is needed to restore the faith and move the shares back in the right direction and it’s hard to see where that will come from, at least for the time being.
ADVICE Hold
WHY Moonpig has a decent game plan but it could take a while to flourish
