Visa Inc. (NYSE:V) reports earnings after the bell today. Since the company broadly faces US/global consumers, it will be interesting to see what they have to say about how much consumer demand has slowed down. In the long run, Visa, Mastercard (MA), and American Express (AXP) are some of the best businesses around.
Visa has an oligopoly on payment processing, entrenched network effects, and leverage on global e-commerce growth. There’s something to be said for the tech-it’s pretty rare for people to pay with checks now, and contactless chip payments will make paying with Visa even easier going forward. All you really have to do is look at Visa’s last 10 years of financial statements to see that the company has a very healthy and steadily growing business. Visa has AA-rated credit as well, indicating a very healthy financial position. By this measure, Mastercard is a little more leveraged than Visa but still has an “A+” rating. One would think American Express would be a good deal riskier due to the fact that they lend money rather than simply process payments, but they’re A-minus rated as well.
The point of this is – payment companies are among the best-looking businesses around from a lender’s standpoint and have performed significantly better than the S&P 500 at large for shareholders over the past 10-15 years. While Visa hasn’t skyrocketed to the same extent as big tech winners like Amazon (AMZN), the company has been far less volatile.
Remember that almost all of the gains of the stock market come from only 20% of the stocks while a substantial portion loses money outright over long periods of time. If you fill your portfolio with good businesses, you’ll have a much better time in the markets than if you buy junk stocks on hope.
Visa Earnings: What To Look For
- First and foremost, I’d want to know what Visa thinks about consumer spending. I think that consumers will be slowing spending, but Visa is uniquely positioned to benefit from inflation. Since the company pretty much just is a tollbooth for financial transactions between consumers and merchants, they really don’t have to worry about inflation. In fact, in their last quarterly conference call, they noted that they’re a “beneficiary of inflation.” Very few companies can legitimately make that claim, and my guess is that many companies are going to see their revenues surge while their profits shrink, as happened in the 1970s. Visa has a lot of pricing power! This said, consumers seem to be hitting the brakes, so I think you can get a share price correction to a better valuation for Visa. I’d be patient on this as Visa isn’t likely to completely buck the macro trend with the valuation (about 30x earnings) being higher than the market at large.
- Tech. Contactless payments have to be helping Visa’s numbers. When traveling, I’ve seen subway stations where you can pay with a contactless card without wasting much time at all. Imagine how much transaction volume that drives! This was the idea behind how Apple (AAPL) was going to take over the payment space, but as a consumer, I’ll note that contactless chip cards are far easier than Apple pay.
- Disruption on the horizon? The main risk to Visa stock is that they’re disrupted by competition or new tech. Like most big tech companies, Visa benefits from network effects – merchants don’t have much of a say on whether they accept Visa or not if they want to deal with the public. It’s extremely hard to start a new payment network (or social media network, or cloud computing service), but if you do and get it accepted, the payoff is huge. The biggest threat comes from the banks, but they’ve never been successful at pushing out payment tech companies. Sometimes perception equals reality with threats of disruption, as you saw with Amazon’s failed endeavors to take over the pharmacy business that saw CVS Health (CVS) become a great deep value play (or a busted growth stock, depending on when you bought). PayPal (PYPL) seems to be going through this growth to value phase right now and is worth a look if you believe in their business plan. If one was to make a business school case study on Visa, the thing that stands out with them is their willingness to partner with potential disruptors. This strategy has been successful so far, and Visa even has an arm that invests in fintech opportunities.
- E-commerce. Global e-commerce gets bigger every year, so the main question is whether the pandemic changed the trajectory of this or simply pulled it forward. A changed trajectory is better for Visa shareholders than pulled forward.
- Crypto. Visa is into crypto in low-risk ways, which is nice for shareholders without creating much risk.
Visa is a great business, which isn’t a secret. As a blue-chip stock, you’re not going to get double-digit consistent growth rates for a below-market P/E ratio. As such, Visa trades for a hair under 30x FY 2022 earnings. In my opinion, this mostly spoils the party unless you have a very long time horizon. If the macro environment were a little better, I think I could overlook this easier, but with stimulus unwinding, I think V stock is either due for a couple of years of sideways movement or a correction along with the market.
In a theme that you see fairly often on Seeking Alpha’s quant system, Visa gets an F for valuation but generally good grades elsewhere. At $140 though, this stock would be immediately on my shopping list (note that there’s nothing magical about the $140 mark-if the stock went sideways and traded for 20x earnings in a couple of years I’d buy that too). I wrote a similar opinion on Microsoft (MSFT) a while back in that it’s a great business, but the blue-chip valuation limits the upside. Visa is by no means the worst offender in terms of large-cap valuation but given where the market is I think you can put this one on a watchlist and look to buy into a broad market correction.