3 Pros and 3 Cons of Visa Stock

It’s been a decade since Visa (NYSE:V) stock went public. When the IPO of Visa stock took place, things were certainly looking bleak, as the financial crisis was deepening. Consider that the offering came a week after JPMorgan (NYSE:JPM) acquired Bear Stearns for a measly $2 per share (the deal also required a mega loan from the Federal Reserve).

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Despite all that, investors still bought  $17.9 billion of V stock. On its first day of trading, V stock price rose by an impressive 28%.

Anyone who bought Visa stock during its IPO and held onto it would have benefited from hefty gains. For the past ten years, the average annual return of V stock was 28.28%.

While all this is great, what can we expect in the years ahead? Is V stock still a good buy? To find out, let’s take a look at three pros and cons of Visa stock:

Visa Stock Pro: Dominant Platform

Visa operates the world’s largest payment network, with 3.3 million cards in use across the globe. The company processes an enormous 188.1 billion transactions per year.

The result is that Visa has been able to benefit from powerful network effects. That means that the more consumers become part of the system, the more attractive it is for merchants to participate in it. As a result, it is extremely difficult for other companies to effectively compete with Visa. Besides Visa, only Mastercard (NYSE:MA), American Express (NYSE:AXP) and Discover Financial Services (NYSE:DFS) have credit-card networks in the U.S.

Visa Stock Pro: Innovation

Visa continues to invest heavily in R&D. For example, the company has built Visa Direct, which enables payments to be sent to credit cards.

Then there is the company’s tokens. which are used for digital payments. This technology has been shown to greatly reduce fraud, but is also quite convenient.

M&A and venture-capital investments have been critical for bolstering Visa’s innovation. Note that Visa has taken equity positions in companies like Square (NYSE:SQ), Klarna, Payworks, Stripe and SolarisBank.

Visa Stock Pro: Strong Financials

As shown by the company’s, second-quarter results, released in April,  Visa’s growth remains fairly steady. Its revenues increased  8% to $5.5 billion, as there was strength across all its main businesses

Visa’s margins remain juicy, at over 54%. In Q2, its net income came in at $3 billion, up 14% year-over-year.

And its balance sheet is solid. It has about $15 billion of cash.

Visa Stock Con: Regulatory Risk

A key part of Visa’s business model is interchange fees. But for many merchants, those fees have become a costly burden. So they have lobbied in multiple countries, including the U.S., to  convince regulators to reduce the fees. If they succeed, Visa’s bottom line would definitely be adversely impacted. According to the company’s 10-K:

“When we cannot set default interchange reimbursement rates at optimal levels, issuers and acquirers may find our payments system less attractive. This may increase the attractiveness of other payments systems, such as our competitors’ closed-loop payments systems with direct connections to both merchants and consumers. We believe some issuers may react to such regulations by charging new or higher fees, or reducing certain benefits to consumers, which make our products less appealing to consumers. Some acquirers may elect to charge higher merchant discount rates regardless of the Visa interchange reimbursement rate, causing merchants not to accept our products or to steer customers to alternate payments systems or forms of payment.”

Visa Stock Con: Competition

Visa faces intense competition from alternate payment providers, such as PayPal (NASDAQ:PYPL), Alibaba’s (NYSE:BABA) Alipay and China’s WeChat. All of those competitors have the benefit of massive digital platforms.

Then there is Facebook (NASDAQ:FB), which is creating a cryptocurrency that uses blockchain technology. Called Libra, FB’s cryptocurrency is expected to hit the market next year, with a focus on  consumers who don’t use banks. If it catches on,Visa stock price could be negatively impacted, since FB has the benefit of its 2+ billion user base.

Visa Stock Con: Valuation

Given Visa’s competitive advantages, Visa stock does deserve to trade at a premium. But then again, the valuation of V stock has become steep. Note that the forward price-earnings ratio of V stock is about 28  and that Visa stock does not pay a dividend. To put that into perspective, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) has a PE ratio of 21 and FB is at roughly the same level. Those companies are also growing much more quickly than Visa.

As for Wall Street analysts, they remain bullish on V stock, but their enthusiasm is tempered. Based on analysts’ average target price on V, Visa stock price is expected to climb about 13%.

The Verdict on Visa

Visa certainly has some major risk factors. Perhaps the most important one is its competition. As we’ve seen in various industries, startups can unleash disruption quickly.

But so far, Visa has done a good job of innovating. Moreover, the overall credit-card market is likely to  grow in a non-cyclical manner. Keep in mind that, worldwide, consumers still use  cash and checks to pay for about $17 trillion of goods and services. Consequently, there’s still a great deal of room for credit-card usage to increase. There are also big opportunities for Visa in business-to-business transactions and peer-to-peer payments.

Given all of Visa’s positive attributes – including its strong financials, robust platform and powerful technologies – the pros of V stock outweigh its cons.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/3-pros-and-3-cons-of-visa-stock/.

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