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Visa: Great Stock; Is It Worth the Price?
Stock Analysis & Ideas

Visa: Great Stock; Is It Worth the Price?

It’s hard to believe that shares of credit card behemoth Visa (V) have gone virtually nowhere for over two years now. The latest 18% pullback in the stock may be nothing more than a chance for long-term thinkers to top up their positions in one of the most stable earnings-growth darlings over the last few decades.

Still, with interest rates rising and the possibility of economic growth stagnation, even quality payments players like Visa are unlikely to be immune from the pain. While Visa is a cash cow, even in late-cycle market environments, the stock may have gotten ahead of itself when peaking in the middle of last year.

Indeed, Visa’s sell-off, which saw the stock briefly enter bear-market territory, started well before the rest of the market sunk lower. The rise of disruptive forces in the payments space, specifically in BNPL (Buy Now Pay Later), caused substantial selling pressure in V stock.

Though such BNPL firms have now shed a majority of their value, I still think it’s wise to be more mindful of the growing number of potential competitors that could aim for Visa’s share of economic profits in the future.

Competition in Payments is Heating Up, but Visa is Holding Its Own

Thus far, Visa has done a great job of defending its turf. However, as disruptive big-tech firms focus on disrupting the payments space, it could get tricky for Visa to fend off all rivals without taking a minor hit to its margins.

Apple (AAPL) and its deeper dive into payments is a potential cause for concern. The firm’s Apple Card has been an incredible success and could be a hint of what to expect from credit card offerings of the future.

For now, Visa has been making the right investments, but if it fails to enhance the value proposition for its users, Visa stock may not be so quick to bounce back from its recent slide. Trading at around 34.3 times trailing earnings, Visa stock is a tad too rich for my liking, given the rocky macro environment and many rivals in payments. I am neutral on the stock.

Visa Stock: An Economic Downturn Could Weigh Heavily

It’s hard to ignore the recession chatter these days, with the brief yield curve inversion and a Federal Reserve sounding as hawkish as ever.

Though Visa stands to benefit from the continued shift towards online payments, the credit card company’s economic sensitivity could work against it over the medium term if the Fed were to fail to engineer a “soft landing.”

Transaction volumes tend to be positively correlated to the magnitude of economic growth. These days, investors are less than sanguine about their expectations for the economy moving forward, which could impact their spending habits.

Though seemingly unlikely at this time, a stagflationary environment could take a massive stride out of Visa’s step and add even more selling pressure to its stock, as recent strength in payments is replaced by weakness. At a jarring 17.7 times sales, Visa stock may not be discounted by enough to factor in the chances of such a bear-case scenario.

While a recession is a clear negative for Visa, it’s arguably worse for the many BNPL up-and-comers that grew in popularity during the post-pandemic spending boom. As interest rates rise and spending cools, Visa appears to be in much better shape to weather such a storm.

Visa Has Been Making the Right Moves 

Visa knows that it risks losing considerable share as a market leader if it can’t keep up with the times. Fortunately, Visa has been wheeling and dealing to stay on the right side of innovation.

After having acquired Tink and CurrencyCloud last year, the company has been steadily adding to its fintech arsenal. Undoubtedly, Visa isn’t just a sitting duck in the fintech arena; it’s arguably one of the most intriguing innovators in the payments arena.

On the credit card front, I’d look for Visa to include even more new perks and benefits alongside its existing cards to keep consumers from jumping ship or using alternative payment methods, like those offered by BNPL firms. Such added features will likely allow it to keep its margin profile attractive for longer, even as new rivals approach.

Last year, Visa introduced intriguing perks like memberships to Shipt, Skillshare and Sofar Sounds for its Signature and Infinite line of cards. These are very compelling benefits that add value for cardholders. Looking ahead, Visa may wish to team up or even acquire its way to new perks that could improve the overall “stickiness” of its cards with younger consumers.

I think the perks-based approach is a brilliant move by Visa that could make it more challenging for new rivals to compete.

Wall Street’s Take

Turning to Wall Street, V stock comes in as a Strong Buy. Out of 20 analyst ratings, there are 18 Buys and two Hold ratings.

The average Visa price forecast is $275.88, implying upside potential of 33.3%. Analyst price targets range from a low of $235.00 per share to a high of $312.00 per share.

The Bottom Line on Visa Stock

Visa stock is hard to love with today’s recession jitters. That said, the economy may not be nearly as fragile as some of the Fed doubters expect. As management continues making moves to bolster its moat, I think Visa stock is worthy of a lofty premium. However, today’s premium seems like a bit much.

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