Market correction. What market correction? For Visa (NYSE:V), it’s as though the October drop never happened. Visa stock is already up 25% from its December bottom and has hit new all-time highs.

Visa enjoyed a modest pop on its most recent earnings report. That release showed EPS ahead of expectations by a few cents, along with a revenue beat.

But the big driver for the stock has simply been the improving economic outlook and hopes for higher earnings as Visa raises merchant fees yet again. It’s strategy may be about to run into problems, however.

What’s Going on with Kroger?

The first item of concern is that Kroger (NYSE:KR) is expanding its fight with Visa. Last August, Kroger stopped accepting Visa cards at nearly two dozen of its California stores citing high fees. It stepped up its criticism dramatically earlier this month.

Kroger’s Smith’s Food & Drug Store division will stop accepting Visa cards next month. Smith’s operates 142 food stores and 108 gas stations predominately in the Rocky Mountain states.

“While no other Kroger banners are presently affected by this announcement, Kroger continues to explore options to reduce the cost of accepting credit cards in order to keep prices low for customers,” Kroger said in a statement.

Mike Schlotman, Kroger’s Executive Vice President and CFO elaborated:

“Visa has been misusing its position and charging retailers excessive fees for a long time […] They conceal from customers what Visa and its banks charge retailers to accept Visa credit cards. At Smith’s, Visa’s credit card fees are higher than any other credit card brand that we accept. Visa’s excessive fees and unfairness cannot continue to go unchecked.”

Smith’s will keep accepting all rival cards from American Express (NYSE:AXP), Discover (NYSE:DFS), and Mastercard (NYSE:MA), along with, interestingly enough, Visa debit cards. Most Visa bulls have dismissed this move as merely sour grapes from a struggling grocery chain.

A Sign of Trouble to Come?

As it is, credit card companies often earn higher margins on a customer’s grocery purchase than the grocery store itself. While it’s easy to blame Kroger, they face a challenging situation.

Mastercard and Visa keep hiking their fees, taking advantage of a near monopoly situation. Meanwhile, grocery stores face intense competition, with more coming from the likes of Aldi and Amazon (NASDAQ:AMZN) every year.

Over time, as retail gets more challenging, payment fees are likely to come down. As it is, Mastercard and Visa routinely get sued and face regulatory pressure from politicians for charging high fees. See the multi-billion dollar settlement that Visa, Mastercard, and certain banks just had to pay out.

Visa has enjoyed a huge run in profitability since its IPO in significant part since it keeps taking a bigger and bigger portion of the pie in each retail transaction. But this can’t go on forever. For one thing, retailers are going bust left and right. Kroger’s may be an isolated move now, but at some point they’ll put up a joint front to fight back against high fees.

Additionally, technology will offer more and more ways to keep fees competitive. Sure, Visa and Mastercard are easy and secure ways to pay. But retailers, with the right incentives, should be able to move more transactions to competing smartphone-based channels. I don’t see Visa and Mastercard being displaced anytime soon (the tech isn’t moving that fast), but if Visa tries to stick it to the retailers too much, it will encourage faster adoption of substitute options.

Visa Stock: How Much Should You Pay?

What’s the right price for Visa stock? That depends on what you think a proper P/E ratio for the firm is. And that, it appears, very much depends on what part of the economic cycle we’re in.

Between 2010 and 2012, Visa stock consistently traded under 20x trailing earnings. From 2013 to 2015, it generally trafficked in the 25x to 30x range. From 2016 to 2018, things got frothy, with Visa stock consistently over 30x earnings and moving over 40x for a time.

So, today’s 33x P/E ratio could be viewed as a decent correction to where it was over the past couple years. That said, I think there’s still a lot of optimism baked in at current prices. I doubt Visa stock is going back under 20x earnings anytime soon, more market participants have discovered how great a company Visa is. But 25x earnings is certainly a realistic target when the market rolls over.

Earnings have been growing at 15%/year compounded over the past five years. If that were to keep up, 33x earnings seems a little aggressive, but it’s a justifiable price. It is a PEG ratio of over 2x after all, .

However, should earnings growth slow down, 33x earnings is almost certainly too expensive. And with merchants hitting a breaking point on fees, don’t expect Visa to keep being able to increase earnings by taking more of the retail pie forever.

Visa Stock Conclusion

Visa stock makes for a fantastic long-term buy and hold investment. There’s no disputing that fact. If you buy at a halfway-decent price, you are likely to earn a solid total return as the company exploits its dominant market share to keep gobbling up more and more business.

If you’re looking at Visa stock as a shorter-term trade, however, there are reasons for concern. You’re looking at a stock already up 21% over the past year and 15% year-to-date. We’re only in March, so 15% year-to-date is quite the run. Visa stock is already at new all-time highs, well ahead of the market as a whole.

And the analyst consensus for Visa stock is only around $160, suggesting less than 10% upside. Visa stock would have to put up great earnings to get analysts to lift their targets much higher. Again, V stock is a solid investment, but this isn’t the most compelling entry point.

At the time of this writing, Ian Bezek held DFS stock. You can reach him on Twitter at @irbezek.