Visa (NYSE:V) is slated to reports its second-quarter earnings on Apr. 24 after the market closes. The payments processing giant continues to build market share and establish a reputation for beating earnings estimates, enabling Visa stock to trade near its all-time highs.
However, the company has begun to lose one high-profile customer. Moreover, a well-funded competitor has entered the credit-card business. Those developments could cause some owners of V stock to question its rising price-earnings multiple.
Although those issues don’t pose an immediate threat to Visa’s dominance, they could make investors think twice about buying Visa stock at its current levels.
Visa Should Beat Analysts’ Estimates, But Is That Enough?
For the second quarter, analysts on average expects Visa’s earnings per share to come in at $1.24. If Visa hits that target, its EPS will have risen 11.7% year-over-year. Analysts’ consensus revenue estimate is $5.46 billion, versus the $5.07 billion of revenue that the company reported in the same quarter of 2018.
Since V has exceeded analysts’ consensus earnings expectations in each of the previous four quarters, its Q2 results will probably beat the consensus outlook as well. As our society continues to increasingly give up cash, Visa and its peers should continue to benefit from that trend.
Furthermore, Visa continues to gain market share from archrival Mastercard (NYSE:MA) as well as peers such as American Express (NYSE:AXP) and Discover (NYSE:DFS). As late as the third quarter of last year, Visa claimed more than 61% of total U.S. card volume. That makes Visa stock a compelling long-term buy on any pullback, even if the company’s Q2 results are surprisingly negative.
However, I see signs that the short-term outlook of Visa is not entirely positive. The price-earnings ratio of Visa stock now stands at around 34.5. That comes in slightly ahead of the long-term average multiple of V stock, which is about 32.6. Since Visa’s profit is expected to increase 15.2% this year, I think Visa stock price is mildly overvalued.
Meanwhile, V stock looks less than compelling when investors can buy AXP stock at about 14 times its earnings. By buying AXP, whose profits are expected to rise 11% this year, traders obtain about 72% of the growth of Visa at around 40% of the price.
Visa Stock Faces Rising Threats
Also, Visa has used its dominant position to raise the fees that it charges merchants. That has prompted Kroger (NYSE:KR) to refuse to accept Visa cards at some of its locations. For now, Kroger is only refusing to accept Visa’s credit cards at 21 of its Foods Co. stores in California. However, it will soon extend this ban to both its Smith’s Food and Drug stores and its fuel centers in seven states.
That places V in an awkward position. If Kroger stops accepting Visa at all of its stores or if other retailers start refusing to accept Visa cards at some of their stores, Visa’s revenues could meaningfully drop. However, if Visa relents and lowers its fees, that will likely reduce its profits, negatively impacting Visa stock.
Moreover, Apple (NASDAQ:AAPL) has partnered with Goldman Sachs (NYSE:GS) and Mastercard on its new Apple Card. At first glance, the card provides some benefits, such as faster cash-back rewards and enhanced security, since it does not use numbers.
Still, it appears that the card will limit most of those benefits to consumers who are already using Apple’s iOS ecosystem. For that reason, I would not expect the Apple Card to supplant Visa’s dominant position. However, Apple Card could take market share from Visa, negatively impacting the Visa stock price.
Concluding Thoughts on Visa Stock
Although Visa will more than likely post higher-than-expected earnings and revenue, emerging competitive threats could create doubts about Visa stock.
Meanwhile, the valuations of Visa stock have begun to climb above their long-term averages. Also, Visa’s rising fees have started to prompt merchants to push their customers to other cards. Furthermore, the Apple Card will give consumers another reason to avoid Visa.
Despite the new threats, Visa stock should continue to benefit from double-digit profit growth. However, retailers and customers will take advantage of the lower fees of Visa’s peers. Also, traders can invest in a credit-card network at a much lower multiple by buying AXP stock.
As a result, the driving force of Visa stock could be the rising threats of better alternatives for multiple players. That does not mean investors should sell Visa stock. But investors still need to account for those dangers when they’re considering buying V stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.