Those who know Visa Inc (NYSE:V) well will understand that growth hasn’t been a problem for the card-payment middleman. As long as the economy isn’t completely unraveling and consumers are spending, Visa stock will find a way remain the centerpiece of more than 100 billion financial transactions per year.
And, Visa stock has mostly reflected the company’s top- and bottom-line growth, with Visa stock’s price rising more than 550% since going public back in 2008.
Sometimes, though, a stock can get a little ahead of itself when investors are no longer keeping close tabs on a company. That may well be what’s quietly happened with V stock this year, setting the stage for a pullback a handful of observers have finally noticed is due.
Lofty Price Ignores Headwind and Competition
Credit has to be given where it’s due. Visa and rival Mastercard Inc (NYSE:MA) have remained relevant in an environment that could have made them obsolete. The advent of Paypal Holdings Inc (NASDAQ:PYPL) is effectively a means of sidestepping payment mediators altogether. And though digital wallets like Apple Pay from Apple Inc. (NASDAQ:AAPL) actually rely on Visa and MasterCard to ultimately provide the backbone for the cardless payment tool, payers and payees are forever looking to cut Visa out of the process, removing a proverbial tollbooth from the equation. Even against a backdrop of growing legitimacy of cryptocurrencies like Bitcoin, commerce still needs payment middlemen.
Commerce may not need them as much as this year’s 35% gain may imply, however.
It’s an idea BMO Capital Markets analyst Paulo Ribeiro floated in mid-September. He suggested he now prefers Mastercard as an investment rather than Visa, as it’s MasterCard that has the more compelling growth profile, not to mention more earnings visibility for the coming year.
Were it just Ribeiro having this opinion, the idea may not even be worth bringing up. But other observers are in agreement.
The advent of the smartphone has ushered in an era of internet mobility, essentially turning our handheld technology into the computers of yesteryear. This paradigm shift, however, hasn’t completely taken credit card payments with it.
PayPal is by far the most popular digital wallet solution and used by 76% of mobile payment platform users as of the end of last year. The next-nearest competitor is, of all things, Amazon Payments from Amazon.com, Inc. (NASDAQ:AMZN), used by 24% of smartphone owners. Visa finds itself in third place in terms of digital wallet usage, with its VisaCheckout only utilized by 15% of consumers that use smartphone-based wallets.
It’s a problem for Visa stock simply because the world is only going to increasingly rely on mobile connectivity going forward, as home-based (or office-based) computers increasingly become obsolete. As of November of last year, on a global basis, more individuals connected to the web through a mobile device than they did a traditional computer. Yes, Visa will benefit from the ongoing adoption of mobile connectivity as a mainstream means of connecting to the web. Its alliance with Apple though — and even its alliance with PayPal — won’t be enough to offset the brewing demand headwind.
Bottom Line for Visa Stock
And that’s when it hits you. Visa stock’s trailing P/E of 39.2, as well as the forward-looking P/E of 26.4 it currently sports, aren’t quite justified.
That’s certainly not to say the company is doomed. Indeed, it would be surprising if Visa didn’t manage to continue growing its top and bottom line at a healthy pace. It is to say, however, the stock is priced for growth that’s not been achieved in the past, nor is expected to be achieved in the future. Revenue growth is expected to be in the single digits through the middle of 2019, and earnings growth is only projected to be in the teens for the same time frame.
The market is likely to make the necessary adjustment to the Visa stock price sooner than later.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
