Despite a valuation that would give an Internet entrepreneur a nosebleed, Visa (NYSE:V) still has analysts pounding the table for it. Marketwatch, for instance, still counts 39 analysts on the Visa stock beat.
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Of that number 30 have it rated a buy, and only one has it as low as an underweight on valuation. This despite Visa being up 31% in the first half of 2019.
It’s extraordinary faith for a company that now has a market cap of $406 billion on $20.6 billion in 2018 revenue. Expectations are for earnings of $1.33 per share when it reports July 23, with a “whisper number” of $1.37 per share, on revenue of $5.7 billion. The price to earnings ratio for the last four quarters is over 37.
Among transaction processors, high valuations aren’t unusual, but this is extreme. MasterCard (NYSE:MA) has a market cap of $285 billion on revenue of $15 billion. Square (NASDAQ:SQ) is worth $34 billion on 2018 revenue of $3.3 billion.
The Bull Case for Visa Stock
What the bulls see is the end of cash and its replacement by Visa’s payment system. They also see a company with a net margin of 50%. Last year $10.3 billion of its $19.9 billion of revenue hit the net income line.
Bulls say Visa continues to innovate with Visa B2B Connect, a business payment system enabling seamless payment connections between international banks.
They like its purchase of privately-held Verifi, for an undisclosed price, as a way to help merchants reduce chargebacks.
They love a pilot program that will let merchants offer installment payments directly from their cash registers. They’re even cheering the $75 million purchase of Rambus’ token and smart-ticketing business, even though that business cost Rambus itself $105 million two years ago.
Quite simply, analysts believe Visa stock is unstoppable. Because its bank payment network is used by so many third-party processors, innovations that fail outside it can succeed inside it. When Visa tells other processors to jump, they still drop what they’re doing to ask, “How high?”
Visa Stock Has Real Risks
The risks with Visa are those of the global economy.
This means the risks are rising. The global economy is now growing at just 2.6% per year, and the World Bank says risks are firmly on the downside. China’s growth has slumped to an annual rate of 6.2% and the trade war continues to bite.
Even if electronic payments are taking an ever-bigger piece of that pie, processors like Visa remain under threat on pricing and costs. India’s Unified Payments Interface offers lower costs in order to reduce the use of cash there. Chinese systems like Alipay from Alibaba Group Holding (NASDAQ:BABA) cost less, too. Nationalism is also increasing. India won’t let processors take customer data outside the country.
Visa is trying to get ahead of low-cost systems by joining Facebook’s (NASDAQ:FB) Libra Association, but it still has enormous technology debt. Visa runs an incredibly costly network of charge agreements among banks, merchants and customers that has developed over decades and costs money to maintain.
The Bottom Line on Visa Stock
Visa is the premier player in the global payments space, but does that make it a great investment at its current price?
Square costs just 10 times revenue, and it’s growing much faster. True, Square is only marginally profitable, while Visa is a profit-making machine, still growing at 10% per year. Visa looks safer.
If you got into Visa as an income investor five years ago, when it was paying a dividend of nearly $2 per share on an investment of $63, your current yield is just 1.5%. It might be time to take some profits and invest them for a higher yield. Even younger investors might start looking for a good exit point. A profit is only paper until the cash is in your hand.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.
