Visa (V) was in the news for all the wrong reasons last week. After Visa hiked its transaction processing fees, Amazon (AMZN) announced that it would no longer accept payments on transactions from Visa credit cards issued in the U.K., as of January 19, 2022.
“The cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers,” a spokesperson for Amazon told Bloomberg.
This has stoked investor concerns and has led to the stock falling by approximately 3.3% in morning trading Friday.
Are these investor concerns valid? Mizuho Securities analyst Dan Dolev doesn’t think so.
The analyst believes that its current dispute with Amazon is “transitory” given the management commentary and the resolution of a similar dispute with Walmart Canada (WMT).
In fact, Dolev quoted Visa vice-chairman and CFO, Vasant M. Prabhu who commented on the dispute, “We’ve resolved these things in the past, and I believe we’ll resolve them in the future … It is our expectation that there will be a resolution so that UK consumers are not impacted.”
The analyst also addressed some other key investor concerns about the stock in his report.
Still Room for Cash-to-Card Runway
Dolev thinks that there is still plenty of room for growth post-COVID when it comes to cash-to-card conversions.
The analyst pointed out the data that indicated that as of “3Q21, Visa and Mastercard (MA) volumes accounted for 47% of US PCE [personal consumption expenditure].” Moreover, Dolev added that around $8 trillion of total $15 trillion to $16 trillion annualized PCE is still not card-based. (See Analysts’ Top Stocks on TipRanks)
He commented further, “Plus, with the US accounting for 20-25% of global GDP exChina [excluding China], the implied global un-vended opportunity for V/MA may be 4x larger, or $30-35tn.”
Investors have also been worried that after the COVID-induced spurt in e-commerce growth that benefited Visa, this could be the end of the e-commerce runway.
Dolev acknowledged that the boost from the e-commerce business is particularly important for Visa as it “captures a much larger share (est. 3x higher) of e-commerce checkout vs. brick-and-mortar because cash is typically not an option in e-comm.”
However, the analyst brushed aside investor concerns as assessing U.S. retail spend data “suggests that: (1) E-commerce still accounts for 13% of total retail spend. (2) The reopening is triggering a reset back towards card-present, which creates more room for consistent increases in e-comm penetration, potentially benefiting Visa.”
The rise of Buy Now, Pay Later has resulted in investors being concerned over the future of card companies like Visa.
Here, the analyst cited data from Australia that has been an early adapter of BNPL, and as such could indicate the potential future behavior of this trend in the U.S.
Dolev said that this data indicated that “while credit volumes are trending lower, this is being more than offset by rising debit volumes, which drives up overall card volumes.”
Alfred F. Kelly, Visa chairman, and CEO, commented on its earnings call about how the company plans to address the BNPL trend, “But we are bringing scale to disrupters. We have a two-pronged strategy where we provide a network solution as well as solutions for our BNPL fintech partners. The network solution offers issuers the ability to extend installments to their existing credit clients and merchants to offer a seamless installment option to their customer with flexible terms.”
As a result, Dolev remains upbeat about the stock with a Buy rating and a price target of $255 (29.5% upside).
Rest of the Street is also bullish about Visa, with a Strong Buy consensus rating based on unanimous 14 Buys. The average Visa price target of $277 implies 40.7% upside potential to current levels.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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