Wise's growth is more expensive than expected

When Wise (WISE) was founded in 2011, its aim was to make international money transfers as cheap as possible. Traditional banks charged fees as high as 3 per cent to move money across borders. The level of the charges were routinely disparaged and Wise knew it could be done a lot cheaper. It was an admirable mission and it has brought the payment business rapid customer growth.

In the year to 31 March, Wise’s take rate on transactions was 0.63 per cent, down seven basis points from the year before. This low rate is attracting customers. In the last quarter of 2022 it had 4.6mn customers, 31 per cent more than a year earlier. And customers were transferring £4,700 on average, 7 per cent higher on a year-on-year basis.

More customers and more transactions pushed total revenue up 33 per cent to £560mn. Gross profit also increased 43 per cent. These numbers are impressive. However, to achieve this growth Wise have been spending a lot more on administrative and marketing expenses.

In total, administrative expenses increased 48 per cent to £321mn. Employee expenses were the main driver – wage inflation is a problem for many tech companies – rising 31 per cent to £184.8mn. Meanwhile, marketing expenses were up 30 per cent and outsourced costs rose 55 per cent. This meant the adjusted cash profit margin was 21.7 per cent, down from 26 per cent last year and below the 23 per cent consensus expectation.

The company insists it is “continuing to operate a disciplined approach to return on investment for marketing”. However, the very act of making this assertion suggests you are worried people think that you aren’t. Wise currently has 3.5 per cent of the cross-border market and wants to capture as much of the remaining opportunity before other competitors join the low fee party.

Today, Atlantic Money secured a EU licence. It offers a flat £3 fee for any transfers up to £1mn which for higher value transfers is significantly cheaper than Wise’s current proposition. As well as Atlantic Money, banks could also drop their transfer fees to compete, while the world of crypto offers another avenue for customers to move wealth across borders.

Wise is aiming for annual revenue growth above 20 per cent in the medium term and broker Numis believes this is possible. Inflation should help it achieve these aims as Wise takes a percentage fee on transfers. FactSet consensus expects EPS to more than triple to 10p in FY 2024, which gives a 2024 PE ratio of 33. The multiple has contracted significantly from earlier this year (in common with tech stocks generally) and despite the rising operating costs, this looks like a reasonable entry point. Growth comes at a cost and given £113mn in cash flows, investors should not be complaining too much. Speculative buy.

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