Buying a cheap stock doesn’t guarantee that you’ll earn a decent return on your investment. Often, cheap stocks are cheap for a reason.

However, there’s a cheap stock in the UK market right now that, to my mind, is massively undervalued and has a ton of potential. I reckon it can potentially double my money over the next three years – here’s how.

An opportunity to explore

The stock I’m talking about is Wise (LSE: WISE), the financial technology (FinTech) company that specialises in low-cost, fast international payments.

I’ve used its platform to send money abroad for over a decade now. It’s brilliant – not only does Wise offer the best FX rates in the market but transfers are unbelievably quick (in Q1 77% of transfers were instant).

This stock looks undervalued

At present, Wise shares trade for around £9. That looks too cheap to me. I reckon we could see them trade for £18 or higher within the next three years. Here’s the maths…

How Wise shares could double

Over the last five years, Wise’s revenue has climbed from $550m to $2.5bn. That represents a compound annual growth rate (CAGR) of 35%.

Now, revenue may not grow that fast over the next three years. But let’s say it grows 26% a year on average (note that analysts expect 38% growth this year) as the company expands its business-to-business (B2B) platform and cross-sells products like multi-currency accounts, index funds, and interest accounts to retail consumers.

That would result in revenues doubling to around $5bn. And if that happens, we could potentially see the share price double too.

So top-line growth alone could lead to big share price gains. I’m assuming here that profit margins don’t fall significantly.

Scope for a higher valuation

The story here isn’t just about growth though. As I said at the top, this is a cheap stock. Right now, Wise trades on a forward-looking price-to-earnings (P/E) ratio of just 16. That seems way too low to me – given the revenue growth rate a P/E ratio of 22-25 would be more appropriate.

So let’s say the P/E ratio rises to 22 over the next three years. That valuation re-rating could lead to a 35% gain in the share price (ignoring any growth in earnings).

Note that the recent Nasdaq listing could help to boost the company’s valuation over time. This should be be good for visibility

Worth a closer look

So we have two potential share price drivers here – revenue growth and a valuation re-rating. Combine them, and I see the potential for the share price to double over the next three years.

Of course, there’s no guarantee that it will and my investment thesis could be derailed by an economic slowdown, new disruptive payments technologies (eg stablecoins), or regulatory issues. But as I said, I see a huge amount of potential here – I believe this growth stock’s worth a closer look.

Should you invest £5,000 in Wise Plc right now?

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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Wise Plc made the list?

Edward Sheldon owns shares in Wise and Nasdaq.