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Visa Stock: Valuation Stretched, Warren Buffett Trims Stake
Stock Analysis & Ideas

Visa Stock: Valuation Stretched, Warren Buffett Trims Stake

Shares of credit card powerhouse Visa (V) are back on the retreat following a modest relief rally off its $190 per share December lows.

Now that the rally has faltered, Visa now seems likely to retest its 52-week lows. With such a stretched valuation and a commanding lead that the firm could lose amid the rise of disruptive payments players, it’s that much harder to stand by the stock.

Warren Buffett recently dumped around $3.1 billion worth of Visa and Mastercard shares in the latest quarter. The big trim, I believe, paints an ugly picture for the questionably-valued credit card firms that could see their margins be challenged moving forward.

Although I’m a big advocate of doing your own research and making your own investment decisions, it’s tough to ignore Buffett’s latest moves. For now, I remain bearish.

Visa’s Premium Multiple May No Longer Be Warranted

Visa’s track record of earnings growth is phenomenal. The perfect mix of high revenues and margins has made the wide-moat credit card firm a staple in the portfolios of brilliant investors like Warren Buffett.

Times are changing, though.

The financial services industry is ripe for disruption, and it has been in recent years. The rise of BNPL (Buy Now Pay Later) firms has been a source of concern for incumbent payments plays like Visa. While Visa still has a moat, I view it as narrowing from tech-savvy counterparts that could cause many prior credit card users to go with alternative options.

Consumer credit card debt is arguably the worst type of debt to keep on your personal balance sheet. Sure, it’s convenient and even rewarding if used responsibly.

That said, I find it difficult to see a scenario where Visa or Mastercard retains its incredibly high margins over the next decade. Not with so many firms looking to lure millennials towards their more attractive, lower-cost offerings.

Like it or not, Visa is a leader that will need to play defense. Can it play defense well?

Given the caliber of its management team, I’d say yes, it can play it very well. The company is well aware of the disruptive forces out there, and it’s been quick to adapt.

Visa Installments (its BNPL product), crypto-linked cards, and strategic partnerships (the latest being with Latin American fintech Tribal) will help Visa stay on the cutting edge of payments innovation.

Visa’s Margins Could Be Challenged

While Visa is still an innovative company in the fintech world, I think it will have to open up its wallet to stay well ahead of any potential rivals in payments. Indeed, this could weigh slightly on margins moving forward for marginal sales growth.

If margins are challenged in such a way, I think Visa stock deserves a mild valuation reset. As most other high-multiple stocks plunge in this correction, I do think V stock could be at risk of greater downside from here.

In any case, Visa’s moat doesn’t look nearly as wide as it used to, and that’s probably one of the reasons why Buffett did some selling of his V and MA shares in the last quarter.

Wall Street’s Take

Turning to Wall Street, V stock comes in as a Strong Buy. Out of 19 analyst ratings, there are 16 Buys and three Hold recommendations.

The average Visa price target is $273.47, implying an upside potential of 43.3%. Analyst price targets range from a low of $210.00 per share to a high of $312.00 per share.

The Bottom Line on Visa Stock

Visa is one of the best-known blue-chip stocks out there. Over the medium term, robust payments volume could prevent the stock from going into free fall.

However, with so much disruption in the financial services scene, it’s hard to justify Visa stock’s over 16x price/sales multiple.

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