Is Visa Stock A Buy Or Sell After Recent Earnings? (NYSE:V) (2024)

Visa (NYSE:V) comes to mind as a clear pandemic beneficiary, yet its stock has not reflected that sentiment. The stock jumped double-digits after its latest earnings report, as management guided for the next several years to see accelerated growth relative to pre-pandemic levels. Yet even after the jump, the stock remains priced barely higher than pre-pandemic levels, giving investors an opportunity to buy the stock at a reasonable valuation ahead of many elevated growth years. I rate the stock a buy with 15% projected annual returns over the next 5 years.

Visa Stock Price

V typically sports a consistently rising stock price. The past 2 years have seen the stock more or less stagnate, returning only less than 10% from pre-pandemic highs.

While it is not immediately clear that its financial results have benefitted that much from the pandemic, that is mainly due to not all of its revenue sources having recovered. In reality, the pandemic greatly accelerated the war on cash, which should provide for smooth sailing for V stock over the next several years.

How Were Visa Stock Earnings

V delivered earnings which comfortably beat consensus estimates on both the top and bottom lines.

Wall Street liked earnings so much that the stock bounced 10% amidst what could only be described as a difficult market for tech stocks.

V Stock Key Metrics

We can see below that V has clearly rebounded since pandemic lockdowns, as payment volumes are higher than pre-pandemic levels. Yet the growth may be understated. As we can see below, total payments volume is around 40% higher than 2019 levels but excluding travel the growth may be more.

V continues to grow total cards at a 10% clip.

These days, V is a well known growth story in the war on cash. Each new generation is more likely to use credit cards, fueling growth for as far as the eye can see. V grew its earnings to $1.81 per share - 24% higher than the same quarter in 2019.

Much of that growth was clearly driven from share repurchases, as revenues are only 16% higher than in 2019. As travel inevitably rebounds, I expect V to come out of the pandemic in even stronger shape.

Yet V is also a free cash flow story as it does not have to reinvest excess cash back into the business. In comparison to the $3.9 billion in non-GAAP net income generated in the quarter, V generated $4.1 billion of free cash flow, all of which was returned to shareholders through dividends and share repurchases.

I consider V to be a mature growth company in that it has fully embraced rewarding shareholders along the way. Its balance sheet does not have net cash as cash and debt balance out. This may put off some investors who notice the net cash positions of many beaten-down tech stocks, but another way to look at it is that V management is more likely to optimize the balance sheet. This may manifest in the company eventually taking on net leverage to accelerate share repurchases. Assuming a debt to EBITDA ratio of 2x, V can take as much as $32 billion in additional debt, and that number grows as V continues to grow its earnings power.

What Is Visa Stock's Forecast?

V has guided for FY22 to see revenue growth in the “high end of high teens.” We can see consensus earnings estimates below:

V looks reasonably valued relative to these estimates, but these estimates may prove conservative. On its conference call, management stated the following:

“As we look ahead, we expect accelerated revenue growth versus pre-COVID over the coming years, driven by our three strategic levers of consumer payments, new flows and value-added services. Many current trends in payments, including A2A, RTP, Buy Now, Pay Later, crypto and wallets are enabling new ways to pay. These represent opportunities for Visa, where we are extraordinarily well positioned to utilize our unique strength and global network to help them grow and scale.”

There’s yet another reason to believe in that aggressive guidance. Physical merchant acceptance locations totaled 61 million at the end of 2019, and stood at 80 million by the end of 2021. Even if overall spending was tempered by COVID lockdowns and overall negative sentiment, the increased number of acceptance locations means that upon a global recovery, V stands to take share from cash at an accelerated pace.

Is V Stock A Buy, Sell, or Hold?

Assuming V can deliver faster revenue growth versus pre-pandemic levels, that would suggest revenue growth in the 13% to 15% range over the next several years. Due to operating leverage, V should grow earnings per share at a materially faster rate - perhaps at a 18% to 20% rate (it would be around 25% assuming full operating leverage). Priced at 32x earnings, the stock might not appear obviously cheap considering the 1.6x price to earnings growth ratio (‘PEG ratio’). However, the clear visibility into forward growth as well as the high shareholder returns warrant the premium multiple. If we assume 18% average earnings growth over the next 5 years, then V will find itself trading at 14x earnings by then. Assuming the stock then trades at 28x earnings, this represents potential annual returns of nearly 15%. I have not incorporated any benefit from share repurchases and dividends, which add a further 3% to the annual return potential. 15% annual returns over many years is attractive considering the lower-risk thesis at V. There remains the risk of competition or disruption, but this has not materialized over the past many decades. Perhaps it is possible that close competitor Mastercard (MA) finds a way to win contracts away from V, which has not been typical historically but is arguably the main risk here. I rate shares a buy as the stock can materially outperform the broader market over the long term.

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