Visa (NYSE:V) is up more than 25% over the past year, stoked in part by Federal Reserve rate hikes of 2018 that have translated into higher profit margins for credit card companies. The overall fundamental strength of the company has also been the catalyst behind the Visa stock returns.
The world’s largest retail electronic payments network, Visa, is expected to report earnings in late July. There could be some volatility and profit-taking in Visa in the coming weeks, especially as many other financial services firms also report in July.
However, I’d encourage long-term investors who would like exposure to the sector to regard any dip in the share price as an opportunity to add Visa stock to their portfolio.
Long-Term Visa Stock Strengths
Robust Fundamental Numbers: Visa is a quality blue-chip company with a $370 billion market cap. Since going public in 2008, Visa has rewarded shareholders continuously.
The group does not issue credit cards or lend money. Instead, the company operates as an “intermediary,” charging a fee on each of the 150 million transactions its network handles every day.
Visa has three sources of revenue:
- Service revenues (for services provided to card issuers for the use of Visa products);
- Data processing revenues (fees Visa collects for the authorization, settlement, or clearing); and
- International transaction revenues (for cross-border and currency conversion transactions).
On April 24, Visa posted better than expected results for Q2 2019. Revenue for the quarter ending March 31 was $5.5 billion, an 8% growth year-over-year (YoY).
Earnings per share (EPS) also increased to $1.31, a 17% YoY increase. As a result of robust growth in payments volume, cross-border volume and processed transactions, the company also increased its outlook for the year.
As one of the major credit and debit card processors, Visa has strong pricing power and a good profit margin that stands at over 54%. Visa’s leadership position in the industry requires financial flexibility so that the management can continue the growth-centric steps. Its current ratio, which measures Visa’s ability to pay off short-term liabilities with its current assets, is a healthy 1.6, compared to the industry average of 2.4.
In fact, Visa and its long-time archrival Mastercard (NYSE:MA) can be said to have a duopoly in the cards network sector. Both companies collect transaction fees for without bearing credit risk and control a majority of the digital payment infrastructure. And there does not seem to be much threat to the dominance of either company.
Visa’s sales numbers are forecast to grow over 10% in 2019 and 2020. Overall, Wall Street expects Visa’s profitability, high margins, robust cash flow and healthy financial metrics to continue in the coming quarters, too — a fact that should bring higher prices for V stock.
Mobile Payments Space: Many of us have already paid for a purchase with our smartphones at least once as mobile payments are fast becoming a convenient and swift method to pay bills or make transfers. Analysts expect the global market to reach $4.5 trillion by 2023.
The most widely used transaction methods include contactless payments without entering the credit card PIN number at the point-of-sale or using a smartphone to pay a merchant or even a person such as a friend or family member, i.e., peer-to-peer (P2P) payments.
If you are looking at ways to benefit from this trend, Visa may be a solid company to consider. It’s been boosting its mobile payment offerings. As early as 2011, the group took a stake in Square (NYSE:SQ), the San Francisco-based credit card processing fintech, which was founded in 2009. There are rumors that Visa may end up acquiring Square.
Its other strategic investments include Stripe and Marqeta as well as It’s currently bidding to buy Earthport,a British payments company, that facilitates money transfer services across borders.
Over the past decade, smartphones have become a part of our daily lives and it would not be wrong to expect mobile payments to enter our daily lives in a big way. In other words, as more consumers tap to pay or download an app to transfer money, Visa investors are likely to reap the rewards.
What Could Derail Visa Stock?
Short-term Technical Analysis and Price Charts: Year-to-date, Visa is up 28%. So, in the next few weeks, there might be some profit taking. As a result of the recent impressive run-up in the stock price, short-term technical indicators have become somewhat over-extended. Investors who pay attention to short-term oscillators should note that Visa’s technical message has also become “overbought.”
Leading up to its earnings report in late July, Visa stock could trade sideways for several weeks and even have a pullback toward the low-$160’s or even mid-$150’s level, where the stock is likely to find major support.
Visa stock’s beta is 0.98, which means its volatility on average mimics that of the broader market. Therefore if the industry or the broader market declines as the companies release earnings, Visa may also be adversely affected.
Investors may consider waiting on the sidelines if they do not currently have any positions open in these tech stocks.
If you already own Visa shares, you might want to hold your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to date.
Current shareholders may also consider hedging their positions. As for hedging strategies, covered calls or put spreads with July 19 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.
I would not advocate bottom-picking in case of near-term price weakness. Yet, I find Visa stock to be a compelling buy candidate and by the end of 2020, I’d expect the shares to reach $180.
Competition in the Mobile Payment Payments Space: The fintech revolution is evolving and the entire payments industry is growing fast. In addition to Visa, several other U.S. companies are leading the mobile-payment race that requires cutting-edge technology. In October 2014, Apple (NASDAQ:AAPL) introduced Apple Pay which has now become one of the dominant digital payment apps in the U.S.
In the P2P space, investors love PayPal (NASDAQ:PYPL) which owns the popular Venmo app. The app has over 25 million users and is ahead of its closest competitors — Apple’s Pay Cash, Square’s Cash App, and Zelle, which is owned by Early Warning Services, a private fintech company.
If there are mixed earnings reports or important news from Visa’s competitors hit the wires, there may be short-term volatility or decline in the stock. For example, if any of Visa peers were to issue an earnings warning, due to a potential slowdown in consumer spending in the U.S. or globally, then Visa shares could also be adversely affected in the near-term.
However, Visa is a solid company with continued growth prospects in mobile payments. Therefore small price dips on daily headlines should not keep long-term investors up at night.
In general, whenever Visa stock price has a correction, such as the one it experienced in late 2018, the shares come back rather quickly, only to make a new high in several months.
Bottom Line on Visa Stock
Visa stock is a fundamentally sound stalwart investment with further growth prospects, profitability, leadership in the respective market, stability, and proactive management — factors that are likely to translate into a strong balance sheet and robust bottom line in the rest of the decade.
There are two important secular trends currently affecting the payments sector in the U.S. as well as many other countries, i.e., payment transactions are increasingly moving to mobile and digital payments are surpassing cash payments. As the industry is growing and being transformed, Visa stock may indeed provide a solid long-term investment for many shareholders.
Investors who are interested in financial services, but do not want to commit all their capital to a single stock such as Visa may also consider investing in various exchange-traded Funds (ETFs) that have Visa as a holding, including iShares U.S. Financial Services ETF (NYSEARCA:IYG), ISE Mobile Payments ETF (NYSEARCA:IPAY), or Vanguard Information Technology ETF (NYSEARCA:VGT).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
