Visa Inc (NYSE:V) stock is down more than 3% in trading Friday after releasing fiscal Q1 earnings Thursday afternoon. And at the moment, it’s difficult to see exactly why V stock has declined.
After all, the Q1 results look impressive, and it came in well ahead of analyst expectations. Meanwhile, guidance for full-year fiscal 2018 was raised, largely due to the impact of U.S. tax reform.
It’s possible that broad market declines on Friday are having an effect. But rival Mastercard Inc (NYSE:MA) was up 1.2% in mid-day trading on Friday, extending gains seen after an earnings beat of its own. More likely, Visa’s plans to increase operating expenses, and perhaps some profit-taking, are the culprit.
Visa stock does look expensive, trading at roughly 27x its updated guidance for FY18. But back in October, I argued Visa was worth paying up for, and even with V stock having gained another ~14%, I still believe that’s the case. Visa is an earnings and cash flow machine with years of growth ahead. Nothing in the Q1 report changes that outlook. It just made V stock a little cheaper.
V Stock: Q1 Earnings
As far as the headline numbers go, the sell-off in Visa stock looks unjustified. Revenue rose 9%, roughly a half-point faster than Street analysts predicted. Adjusted earnings-per-share of $1.08 rose 26% year-over-year, coming in $0.10 better than consensus; 9 points of growth came from U.S. tax reform, and a weaker dollar added another point. Still, organic EPS increased 16% year-over-year — a very solid growth rate.
Looking forward, the news was a bit more mixed, and it might have contributed to Friday’s weakness. Full-year revenue expectations were left unchanged; investors might have been looking for a raise after a strong holiday season. Operating expenses now are guided to rise high-single-digits, roughly 2 points higher than previous guidance. CFO Visant Prabhu explained on the Q1 conference call that reinvestment in the business was the culprit, including an increase in the company’s contribution to employee 401(k) accounts.
Still, full-year guidance looks solid. The company is anticipating the “high end” of mid-20s growth on a percentage basis. Only 9-10 points is coming from tax benefits (net of the increased employee spend). Another 1-1.5 percentage points are coming from currency. That still implies organic growth around 16-18% year-over-year. and the ~26-27% growth is much better than the ~22% the Street forecast coming into the quarter.
To be sure, this is a good quarter and there’s little in the numbers to support a nearly 3% sell-off in V stock. The question is if there’s something beyond the numbers, or the quarter, that should make investors nervous.
V Stock Still Is A Buy
It’s possible that investors are somewhat disappointed even with the earnings beat because they’re comparing Visa’s revenue growth to that of MasterCard. Visa’s smaller rival grew revenue roughly 15% in its holiday quarter, excluding help from acquisitions and currency. That could explain the divergence between V and MA in Friday trading.
And, again, valuation does look like a bit of a concern, particularly in a market that seems rattled this week. V stock is trading at ~28x EPS and a similar multiple to FY18 free cash flow guidance. The rise in operating expenses, which could limit expansion of the company’s already-enormous operating margins in the high-60% range, might have be enough to lead some investors to take profits.
From a long-term standpoint, however, this seems like a lot of ado about nothing. Visa stock isn’t cheap, but by the standards of the payment space it is. Its P/E and P/FCF multiples are lower than that of MA. It’s far cheaper than companies like Square Inc (NYSE:SQ) and PayPal Holdings Inc (NASDAQ:PYPL), even with PYPL’s slide on Thursday.
And there remains years of growth in front of Visa. On the Q3 call, the company talked up its expansive opportunity in India, where CEO Alfred Kelly used a baseball analogy in saying “we’re still in the first — maybe the beginning of the second — inning”. Improved security through EMV implementation should help speed, cost and adoption in the U.S. Visa Europe still has room for turnaround efforts.
V stock is more expensive than most stocks. But there simply aren’t very many, if any, stocks like V. How many companies have more than 50% market share in its home market and operating margins above 65%? How many companies worth $280 billion or more are growing earnings — organically — at 15%+? The list is basically Visa, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB) and Alibaba Group Holding Ltd (NYSE:BABA) — and V stock clearly is the lowest-risk of the group.
Visa stock simply never is going to be cheap. Occasionally, however, it will get cheaper. This is one of those times — and if history is any guide, it presents a buying opportunity for V stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
