The Wise share price has crashed. Should I buy the stock now?

International money transfer specialist Wise (LSE: WISE) saw transaction numbers rising by 36% during the last quarter. But the Wise share price has fallen by 20% from the high of 1,176p seen last month. What’s happening?

Wise’s business appears to be growing, but its share price is falling. I’m starting to think this could be a buying opportunity. Although I’m normally cautious about buying into recent IPOs, I’m really starting to get interested in Wise. Today I want to explain why.

Profitable and growing

When it comes to investing, I’m a bit old fashioned. As a rule, I only buy shares in companies that are already profitable. Wise ticks that box. The company has been profitable for five years. Last year, it generated a healthy 11% operating margin. It’s on track to report significantly higher profit margins for the 2021/22 financial year too.

I also prefer to invest in companies that are growing strongly, especially when they’re quite highly priced. Wise scores well here too.

During the three months to 30 September, the company handled £18bn of currency transfer transactions. That’s 36% more than during the same period last year.

The revenue Wise earned from this activity rose by 25% to £132.8m, compared to last year. This smaller increase is a result of the company keeping its customer fees as low as possible — a key selling point. Falling profit margins are always a concern, but at this stage I’m comfortable with the situation.

What could go wrong?

Traditionally, banks have handled the majority of international currency transfers. According to Wise, the service they provide is slow and expensive. the firm has built its business to disrupt the role of big banks by offering a faster, cheaper online service.

So far, the group has focused on personal customers and small businesses. My sums indicate that the average transfer value per customer was around £4,500 during the last quarter.

Wise seems to score well with small customers, but we don’t yet know if the company will be able to repeat its success with larger business clients. Making gains in this market may be more complex. I’d guess that larger clients will expect a more bespoke service and may come with tougher regulatory requirements.

Wise shares: will I buy?

I think Wise is a good business. I like the way it’s profitable and cash generative. In my experience, this should reduce the risk that shareholders will be diluted in future fundraising rounds.

The only problem I have with buying the shares today is that they’re still quite expensive, despite the recent slump. As I write, Wise stock is trading on around 150 times 2022 forecast earnings, falling to around 120 times forecast earnings in 2023.

My sums suggest it will need several more years to justify its £12bn market cap. At this stage I’m not prepared to make this a big position in my portfolio. But I would be happy to make a small purchase of shares. By doing this, I’d get exposure to this interesting business and would be motivated to carry out more detailed research.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.