Shares of global payments giant Visa (NYSE:V) have been on fire in 2019, rising 35% through the first six months of 2019 to fresh all-time highs. The catalyst? Broadly favorable macroeconomic and market conditions, which have simultaneously supported continued healthy consumer spending trends and a richer valuation for Visa.
In the long run, Visa stock is a winner. The global payments world continues to pivot away from cash payments to card payments. This trend will persist for the foreseeable future. In developed economies, cash usage is still relatively high, giving ample room for further card payment volume growth. Meanwhile, in developing economies, the rapid urbanization and expansion of consumer middle classes will support bigger card payment volume growth.
Visa is the biggest card payment player in the world. Given the card payments space continues to grow at a healthy pace over the next several years, so will Visa’s revenues, profits, and Visa stock.
But, that does not mean Visa stock is the best buy here and now.
Visa stock has come a long way, very fast in 2019, and the present valuation on the stock looks slightly overextended. To be sure, low interest rates today support this slightly extended valuation. But, if and when rates do creep higher, that will pressure Visa’s valuation.
The investment implication? While Visa stock is a long-term winner, this victory is not worthy of paying $180 per share of V stock. Investors should rather wait for this red-hot winner to cool off, and consider buying the stock on the next dip.
Visa Stock Is a Long-Term Winner
Zooming out, the big picture trends supporting Visa stock are exceptionally favorable, and possess a high degree of visibility. This combination of high visibility and big growth ultimately pave a very tangible pathway for Visa stock to climb higher in the long run.
Globally, consumers are pivoting away from cash transactions to non-cash transactions, because non-cash transactions are more convenient and more levered to digital shopping. Global non-cash transaction volume has risen at a steady 10%-plus clip over the past several years.
This trend will persist. Cash usage is still relatively high in developed economies, despite the fact that cash is a less convenient and relevant payment method than card. Card penetration rates in developing economies are still low, and will continue to rise at a rapid pace as those developing economies urbanize and digitize. That’s why global non-cash payments volume is expected to grow at a steady 10%-plus pace for the next several years, while emerging market non-cash payments volume is expected to grow at a 20%-plus pace.
Visa is at the heart of this gloval global cards payment pivot. Excluding China, Visa controls 50% of the global card payments market. The company has consistently rattled off high single digit or better volume, transaction, and revenue growth over the past several quarters. As the global card payments market continues to expand, Visa’s volume, transaction and revenue growth rates will continue to run, at least, at a high single digit. At the same time, margins will gradually expand with scale, and profit growth will be robust.
By that time, Visa projects big profit growth. That growth will ultimately drive Visa stock higher in a multi-year window.
The Valuation Today Is Rich
Although Visa stock is a long-term winner, the price tag on Visa stock today seems a bit rich, and may not produce the best multi-year returns.
Visa reasonably projects as a high single digit revenue grower over the next several years. Margins also reasonably project to keep marching higher at ~100 basis points or less per year. Including buybacks, Visa’s EPS growth should run around 10%-15% over the next several years. At that growth rate, Visa’s EPS will settle around $11 by 2025. Based on a historically average 25 forward multiple and 10% discount rate, that equates to a fundamentally supported 2019 price target for Visa stock of roughly $170.
Thus, at $180 mid-way through 2019, Visa stock seems slightly overvalued.
To be sure, this slight overvaluation is supported by a low interest rate environment. As long as rates remain low, this slight overvaluation in Visa stock will hang around. But, if rates creep higher, that will pressure Visa’s valuation, and ultimately drag on Visa stock.
Bottom Line on V Stock
Overall, Visa stock is a winner. But, in the near term, low rates seem to have inflated the valuation on Visa stock to artificially high levels. It is a “tread with caution” situation. I would not be a buyer until the presently stretched valuation comes down to more reasonable levels.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
