Is Visa Stock A Buy, Sell, Or Hold? (NYSE:V) (2024)

Here is the profile of an investment worth considering:

A company that returned 90% of free cash flow, through dividends and stock buybacks, over the last three years.

A firm with double-digit annual earnings growth over the past decade.

A business with profit margins of roughly 50%.

A stock with an annualized return of approximately 28% over the last decade.

A company that generated $10.4 billion in FY 2012 and now generates over $10.8 billion in net income.

Do I have your attention? That company is Visa Inc. (NYSE:V), and there are ample reasons to believe the long term trend will continue.

With the escalation of ecommerce and contactless payments accelerating due to the COVID crisis, and successful initiatives by management to expand overseas, the growth runway for Visa is lengthy.

However, there is a strong headwind affecting the company’s revenue stream, and it may not fully subside for several years. Furthermore, the shares trade at a rather high multiple.

Recent Results

Visa’s Q4 report was issued late last October. The company cited improvements in payment volume, cross-border volume, and processed transaction growth, versus the COVID stunted results from recent quarters.

Nonetheless, net revenue fell 17% YoY in Q4, and FY net revenues were down 5% versus 2019. The primary negative in the results was cross-border volume dropping 29% YoY for the quarter and 16% for FY20 compared to FY19.

The Stiff Headwind Will Subside

While the pandemic serves to accelerate FinTech related trends, COVID-19 travel restrictions are weighing on Visa’s cross-border revenue. This is of particular concern as international transaction fees are generally higher than other fees. Those fees are charged when the issuer and the merchant are located in different countries. Consequently, a drop in tourism and business travel has an adverse effect on revenue from that source.

The cross-border segment accounted for 34% of the firm’s revenue in 2019 and 29% in 2020. The problem is tourism and travel industries have a long road to recovery..

Global leisure travel is projected to grow at a CAGR of 22.6% from 2021 to 2027. Meanwhile, business travel is forecast to increase by a tepid 5% rate over the next five years. The problem with those numbers is that they are growth rates for severely depressed industries.

The following chart provides the forecast for air travel recovery.

Source The Moodie Davitt Report

The international Air Transport Association (IATA) projects 2021 revenue will be 46% below 2019 levels. This following a 66% drop in demand in 2020.

Reasons To Invest In Visa

Visa checks nearly every imaginable box on my investment list. The company operates as a member of an oligopoly, and it is the 500 pound gorilla of the group.

Visa processed $9 trillion in purchase transactions in 2020. The company counts nearly 16,000 financial institutions as partners. Over 50 million merchants accept Visa, and the firm holds over 50% of the market share in Europe, Latin America, the Middle East, Africa and in the US.

The chart below provides an example of the dominant position held by the company, as well as the growth trajectory of the firm.

Visa has almost 16,000 financial institution partners, 3.4 billion Visa cards in circulation, and 50 million merchants that accept Visa. Visa also processes roughly twice as many transactions as its closest competitor, Mastercard.

Source Seeking Alpha

In 2018, the company processed 53% of the credit card purchase volume in the US.

The following graph provides a forecast of the projected scope of the purchase volume for Visa and its rivals in the US market by 2024. Note the combined market share for Mastercard (MA), American Express (AXP), and Discover (DFS) is roughly two thirds that of Visa.

Source Seeking Alpha

From 2019 through 2024, consumer, commercial credit, debit and prepaid cards are expected to generate $10.72 trillion in purchase volume, an increase of 35.7%.

There is a high barrier to new entrants in the industry. The size of Visa’s merchant network, and the infrastructure required to replicate the company’s offerings would require enormous resources.

The firm also has a global footprint, thereby insulating the company to some degree from economic downturns.

The business is incredibly profitable. In FY 2020, operating margins (using net revenue) were at 65%

Visa is well situated to profit from the move to eCommerce, and as you will see in the next section of this article, the company has strong, long term growth prospects.

The company is riding the eCommerce wave. A study by ACI Worldwide determined eCommerce transactions in the retail sector surged 31% last December versus the same month in 2019.

The Move Towards A Cashless Society

A recent study conducted by Wakefield Research for Visa determined the percentage of small and micro businesses (SMB) utilizing contactless payments nearly doubled from June of 2020 to year’s end.

With greater hindsight into 2020, we can clearly see that the digital payment experiences that excelled the most – contactless and eCommerce – were driven out of necessity and have become more habitual in people's daily lives at a pace not often seen,

Kevin Phalen, global head of business solutions at Visa.

82% of SMB operators adopted digital payment systems, an increase from 67% of SMB owners in 2020.

Consumers prefer contactless payments by a roughly 2 to 1 ratio. 47% of customers won’t shop at stores that don’t offer digital payments, while only 16% claimed they would return to using cash after the pandemic subsides.

Aside from consumer preferences, there is ample evidence that customers spend more, and more often when using contactless payments versus traditional means, thereby providing a strong incentive for businesses to adopt the new paradigm.

Visa has been working to expand tap-to-pay operations. To utilize tap-to-pay, customers touch a card to a credit card terminal. Visa has also extended tap-to-pay to phones and other devices. Aside from ease of use, it provides an additional layer of security, as the device does not leave the hand’s of the consumer.

With billions of phones around the world at the ready, the opportunity that comes with lighting them up as payment acceptance devices is enormous. Visa Tap to Phone could be one of the most profound ways to reinvent the physical shopping experience.

Mary Kay Bowman, global head of buyer and seller solutions at Visa

According to a study conducted by Allied Market Research, the worldwide mobile payment market is set to grow from $1.48 trillion in 2019 to $12.06 trillion in 2027, a CAGR of 30.1%.

The company has a number of strategic partnerships with the likes of PayPal (PYPL) Conferma Pay, and Shopee (SE) designed to expand the firm’s reach. In the 90 days leading up to the last quarterly report, Visa signed deals with Yandex (YNDX), WIng (WING), PAYCO, Naranja X and Easypaisa to continue to expand its global reach..

Valuation And Dividend

The current share price for Visa is $202.02. The current PE is 45.07, the forward PE is 29.94, and the PEG is 3.75.

The 12 month target of 29 analysts is $222.71. The 12 analysts rating V after the last earnings report have a target of $231.25

The 5 year dividend growth rate is 19.53%. The payout ratio is 23.50% and the current yield hovers near .60%.

Seeking Alpha’s Factor Grades provides a valuation score of C-. I have a valuation system that utilizes a number of valuation metrics to arrive at valuation range. My system rates Visa’s valuation as a D+.

My Perspective

Visa operates solely as a payment processor. Consequently, it is immune to much of the risk inherent in the lending operations of its peer group. This business model has led to consistent 50% plus profit margins.

Its vast network of users and merchants results in a competitive advantage that cannot be easily surmounted. The company has taken a number of steps to adopt the contactless system of payments, thereby assuring that it will not fall victim to the prevailing macrotrends.

However, 85% of global transactions still use cash as a form of payment. That provides Visa with a long growth runway as it relentlessly expands its operations across the globe.

There can be little doubt that Visa will continue to grow at a marked pace as it takes advantage of these opportunities.

I have but two concerns regarding an investment in the company at this juncture.

The first, referenced in this article, is the loss of revenue from the drop in international transactions and the projected slow rate of recovery in the tourism and business travel industries in coming years.

The second is the company’s current valuation

With all this in mind, I rate Visa as a HOLD.

One Last Word

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