3 Reasons Visa (V) Stock Will Keep Surging — and 3 Reasons It Won’t

Visa is a perfect growth stock, but it's very expensive

Is Visa Stock Too Expensive at $160 Or Is There Even More Upside Here?

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Visa Inc (NYSE:V) has delivered eye-popping returns for investors. Visa stock has more than quadrupled over the past six years and the gains haven’t let up. Already, year-to-date, Visa stock is up another 35%.

3 Reasons Visa (V) Stock Will Keep Surging -- and 3 Reasons It Won't
Source: Shutterstock

It goes without saying that Visa stock looks expensive. But then again, it pretty much always has since going public. Yet, in hindsight, there has rarely been a bad time to pick up more Visa.

Is it more clear sailing ahead for this all-star stock, or will it finally correct in the coming months?

Visa Stock Cons

Really Expensive Stock: Visa is one of the most reliable performers in the stock market today. Since going public, Visa has beaten earnings expectations 36 out of 38 quarters. That’s an amazing track record.

So, while analysts are forecasting a huge earnings per share growth rate going forward — 14%/year over the next five years — there’s reason to think Visa will deliver. Unfortunately, they’ll have to in order to justify the current V stock price. Visa presently sells at 39 times trailing earnings and 27x forward earnings. Competitor Mastercard Inc (NYSE:MA) has also skyrocketed. Even still, it is at 35x earnings. V stock stands alone at the top of the valuation spectrum. It’s not just expensive on earnings, Visa is also selling at 9x book value and a remarkable 14x sales. This stock is priced for many years of great times ahead.

Locked out of China Market: It’s logical to think of Visa as the world’s largest payments company. But it actually lost the crown recently to China’s state-backed UnionPay network. Based on 2015 data, UnionPay controls 37% of the global market, compared to 32% for Visa and 20% for Mastercard.

While UnionPay is accepted in more than 100 countries, it is primarily a China-focused service. The fact that there are already more than 5 billion UnionPay cards shows the huge lead they have in that market, considering that there are only 1.4 billion Chinese people. China has lifted regulations that had kept Visa and Mastercard out of the market, but, at this point, it will be hard for either to disrupt the entrenched the giant.

Blockchain Disruption Looms: Assuming current technologies persist, Visa seemingly has an impenetrable moat. The world continues to move away from cash and Visa will collect more and more of the spoils as transactions go digital.

Now, though, a new threat has arisen. It’s hard to quantify the exact nature of a potential challenge to Visa from Bitcoin and other digital currencies, but given the huge rise in Bitcoin, Ethereum and other such products this year, Visa stock owners must take the threat seriously.

Blockchain-based payment systems offer several inherent advantages compared to credit cards, including better security and freedom from hacking, along with lower marginal transaction costs. On the other hand, blockchain payment systems face several huge hurdles, including a lack of credible oversight, government scrutiny/regulatory risk and difficulty in scaling up; Bitcoin, for example, processes transactions at a glacial pace compared to credit card networks. At this point, blockchain isn’t an imminent risk to V stock, but investors should still monitor digital alternatives to Visa closely.

Visa Stock Pros

Still Strong Moat: While blockchain is a real threat, there’s little sign that it will imminently disrupt existing business models. A few years ago, we were hearing a lot about potential rivals such as Apple Inc. (NASDAQ:AAPL) and its Apple Pay or Alphabet Inc (NASDAQ:GOOGL) and its Google Wallet.

But these have largely disappeared as threats to Visa. That’s because they didn’t build their own widespread payment networks. Apple Pay, for example, works on top of existing networks, including Visa, thus  complementing, rather than taking away, business from Visa. Visa is accepted in more than 200 countries and partners with 44 million merchants and 17,000 banks and financial institutions. Even the largest tech companies would struggle to disrupt a competitor with that much size.

Surprisingly Recession-Proof: Bears will point to the consumer-spending driven nature of Visa’s business. Surely, with the American economy in its eighth year of recovery, the economically-sensitive Visa stock will eventually face some headwind, right?

Not so fast. Between 2008 and 2009, the company’s revenues, earnings, and EBITDA all increased. And V stock fell far less than the market as a whole. From mid-2008 to the March 2009 bottom, Visa stock only declined around 25%. It’s true that Visa benefits from a continuing economic expansion, but since Visa doesn’t take credit risk, it just gets a cut of fees as a middle man between the consumer and the bank. A recession wouldn’t be nearly as bad for Visa as one might expect.

Huge Dividend Growth: While Visa stock may not seem like a typical dividend play, yield investors shouldn’t overlook the potential here. Yes, it’s easy to look at the 0.6% dividend offered today on Visa stock and forget about it.

However, this small yield is growing quickly. In fact, like the stock price, the dividend is exploding higher. It’s grown at a 30% annualized rate over the past five years. In 2011, Visa was paying just 16 cents/share a year in dividends. It’s up to 66 cents a year now. That’s more than a 300% increase in six years. The company is due for another dividend hike before the year ends. With their payout ratio at just 24%, expect plenty more double-digit dividend increases ahead.

Verdict on Visa Stock

Visa looks like a perfect stock. Even the risks to the business aren’t anything too threatening in the near term. However, V stock is priced accordingly. It will take years of strong growth to justify Visa’s current price. Investors are very optimistic — and with good reason. But risk is still tilted to the downside, as business could hardly get better for Visa.

For investors wanting a payments play, it’s worth taking a look at Discover Financial Services (NYSE:DFS). Yes, Discover isn’t nearly as big as Visa or Mastercard, but it has a key alliance with UnionPay, among other international partners.

It is also selling at just 11x earnings (compared to 39x and 35x for Visa and Mastercard, respectively). And it pays a much larger dividend. While Visa stock may continue to rally, Discover offers a larger margin of safety here.

As of this writing, Ian Bezek owned DFS stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/3-reasons-visa-v-stock-keep-charging/.

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