Aggressive Pricing Gambit Threatens Future Earnings Amid Infrastructure Strain

Key Takeaways

• Aggressive pricing and large transfer discounts could pressure net margins and challenge future earnings if volume increases don't compensate.
  
• Significant investments in infrastructure and direct payment connections aim to reduce costs and improve services but may strain finances without immediate revenue boosts.
  
• Wise's cross-border growth, market expansion, tech investments, and partnerships indicate increased revenue potential through enhanced customer acquisition and cost efficiencies.

Catalysts

Provides cross-border and domestic financial services for personal and business customers in the United Kingdom, rest of Europe, the Asia-Pacific, North America, and internationally.

• Wise's aggressive pricing strategy, involving fee reductions while maintaining profitability, may pressure future revenue growth if competitive pricing does not sustain customer acquisition at projected levels, impacting net margins.
  
• Investments in direct connections to payment systems without middlemen are expected to reduce costs and enhance customer experience, but long-term investment returns are uncertain and may initially strain net margins.
  
• Wise aims for massive market expansion, moving from handling £100 billion to trillions, which requires significant infrastructure investments that might not immediately impact earnings, posing risks to revenue projections.
  
• Wise's strategy to underprice larger transfers could cut into net margins if not yielding a proportional increase in volume, challenging future earnings growth.
  
• Expansion into new financial service licenses and customer support channels demands high capital commitments which may delay impact on revenue streams if regulatory or operational hurdles arise.

Wise Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wise's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.6% today to 14.9% in 3 years time.
• Analysts expect earnings to reach £330.9 million (and earnings per share of £0.32) by about November 2027, down from £431.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £429.5 million in earnings, and the most bearish expecting £256 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.2x on those 2027 earnings, up from 20.8x today. This future PE is greater than the current PE for the GB Diversified Financial industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Wise Future Earnings Per Share Growth

Risks

• Wise has demonstrated significant growth in its cross-border business, tripling active customers and volume over the past four years, and is continuing to make strategic investments which could enhance its revenue and profitability.
  
• The company's expansion efforts into new markets, like India and the Philippines, and securing necessary licenses could increase customer base and cross-border volumes, positively impacting revenue and growth potential.
  
• Technological investments in infrastructure, like direct integrations with national payment systems, could lead to reduced operational costs and improved net margins by eliminating intermediaries.
  
• The Wise Platform’s partnerships with major banks like Standard Chartered indicate potential for substantial increases in transaction volumes which could drive revenue growth.
  
• Wise's strategic focus on offering lower fees through efficiency gains may enhance customer acquisition and retention, potentially increasing overall earnings due to a larger customer base and transaction volumes.

Valuation

• The analysts have a consensus price target of £9.63 for Wise based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £12.5, and the most bearish reporting a price target of just £6.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £2.2 billion, earnings will come to £330.9 million, and it would be trading on a PE ratio of 37.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of £8.8, the analyst's price target of £9.63 is 8.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.