Is Wise’s Direct Listing A Wise Investment?

Is Wise’s Direct Listing A Wise Investment?
Reda Farran, CFA

over 2 years ago5 mins

  • You might want to invest in Wise’s IPO because of the firm’s profitability, its huge growth opportunity, and potential ETF flows that could prop up its price soon after it lists.

  • You might want to avoid Wise’s IPO because of uncertainties related to its direct listing, its dual-class share structure, and rising competition.

  • Based on certain assumptions, Wise could be worth £10.3 billion – higher than its £9 billion rumored valuation, meaning there could be some value in its shares.

You might want to invest in Wise’s IPO because of the firm’s profitability, its huge growth opportunity, and potential ETF flows that could prop up its price soon after it lists.

You might want to avoid Wise’s IPO because of uncertainties related to its direct listing, its dual-class share structure, and rising competition.

Based on certain assumptions, Wise could be worth £10.3 billion – higher than its £9 billion rumored valuation, meaning there could be some value in its shares.

As money transfer giant Wise – formerly known as TransferWise – gears up for its much-anticipated stock market debut on the London Stock Exchange, let’s take a look at whether the fintech success story will actually make a good investment…

Why should you invest?

Wise is profitable and growing

The firm has been profitable since 2017, and it’s grown its revenue at a 54% compounded annual growth rate (CAGR) over the last three years. What’s more, this growth has been virtually entirely funded using its own free cash flow (FCF), which has been positive and growing for the last three years.

There’s a huge growth opportunity

Wise estimates that 97.5% of people’s international payments are still flowing through banks and other providers, all of which tend to be slower and costlier than the firm’s own services. Plus, the overall volume of global cross-border payments is growing fast as people and businesses increasingly look to move money internationally.

Global cross-border payments volume is expected to grow to £24 trillion by 2026. Source: Edgar, Dunn & Company and Wise
Global cross-border payments volume is expected to grow to £24 trillion by 2026. Source: Edgar, Dunn & Company and Wise

It could benefit from ETF flows

Digital payment – and fintech more broadly – is a hot theme currently being chased by many investors and ETFs. The three biggest fintech ETFs – Global X FinTech, ARK Fintech Innovation, and ETFMG Prime Mobile Payments – collectively manage more than $6 billion, and they’ll all most likely add Wise to their holdings. That’ll create a nice source of demand for the firm’s shares from its first day of trading.

Why shouldn’t you invest?

Direct listings can be risky

While a direct listing lets you invest at the same day-one price as everyone else, it also introduces some uncertainties. For starters, we won’t know Wise’s valuation until investors set it on the day. Secondly, no investment banks around means there’s no one to stabilize Wise’s share price in the first few days after it lists, which could lead to price volatility. Finally, a direct listing allows the firm’s existing investors to immediately start selling their shares, unlike in a traditional IPO where there’s a lockup period. That could lead to downward price pressure if a lot of them decide to sell their shares soon after the listing.

Wise is offering a dual-class share structure

Wise has opted for a dual-class share structure that would give the firm’s founders and early backers disproportionately more power than the average investor. That structure was one of the reasons behind Deliveroo’s IPO flop, though at least Wise's dual-class share structure is set to expire after five years.

There’s some big – and rising – competition

Wise isn’t going to have an easy time: it’s in competition with traditional banks, money exchange incumbents including Western Union and MoneyGram, and upstarts like WorldRemit and Revolut – which has some bold international expansion plans.

So what’s Wise worth?

Wise was last valued at £4 billion in a fundraising round last year, and one report suggests it might’ve climbed to as much as £9 billion. But like I say, we won’t know Wise’s actual valuation until investors set it on the day: So it’s a good idea to have some idea of what the company should be worth before placing any buy orders.

One approach we can take is by thinking like a venture capitalist. Revolut is a close fintech peer to Wise that also offers cross-border money transfers and multicurrency current accounts. The firm made $361 million in revenue in 2020 and was valued at $5.5 billion in its last fundraising round the same year, implying a 15.2x sales multiple. Applying that to Wise’s £421 million of revenue last year gives us a valuation of £6.4 billion – higher than its last fundraising round but lower than its £9 billion rumored valuation.

But that potentially undervalues Wise for two reasons. First, unlike Revolut, Wise is profitable. Second, Revolut is eyeing another fundraising round at over $20 billion, implying a much higher sales multiple.

Okay, so how do we decide what Wise is really worth?

A better approach might be to try to forecast Wise’s future profits and apply a valuation multiple to them using some of its publicly-listed peers. The table below shows you how to decompose Wise’s key performance indicators to arrive at its profit – or more specifically, its earnings before interest, taxes, and non-cash expenses like depreciation and amortization (EBITDA).

Wise’s key financial metrics. Note: Take rate is the percentage of transfer volumes that Wise takes as commission.
Wise’s key financial metrics. Note: Take rate is the percentage of transfer volumes that Wise takes as commission.

Wise grew its revenue at a 54% compounded annual growth rate (CAGR) over the last three years and had a 25.8% EBITDA margin last year. The firm’s expecting revenue to grow in the medium-term at a CAGR of over 20% and EBITDA margin to remain above 20%. Feel free to use your own assumptions, but let’s say Wise’s revenue grows at a 25% CAGR through 2024 and has a 28% EBITDA margin that year as the firm’s profits benefit from economies of scale. That’d give us a forecasted £230 million of EBITDA in 2024.

That allows us to value the entire company by applying a commonly used valuation multiple called EV/EBITDA – or enterprise-value-to-EBITDA – with Wise’s publicly-listed peers as a reference point. Because the firm’s fiscal year ends on 31 March, its 2024 (fiscal) EBITDA is more like its 2023 (calendar) EBITDA. And the average ratio of enterprise value to 2023 forecasted EBITDA of PayPal, Square, and Adyen is 44.5x. In absolute terms, this is quite high, but that’s what these stocks are going for today – perhaps because digital payment and fintech stocks are all the rage at the moment.

Applying that 44.5x to our forecasted £230 million of EBITDA gives us an enterprise value of £10.3 billion. To then get its stock market value, we’d normally subtract net debt from enterprise value. But Wise doesn’t have much net debt, so £10.3 billion is also its stock market value.

That £10.3 billion is higher than Wise’s £9 billion rumored valuation, which means there could be some value in Wise’s shares. Of course, that depends on our assumptions proving correct. In reality, Wise could perform better or worse, so feel free to have a go at valuing Wise using your own assumptions.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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