Back in July 2019, I wrote that shares of global payments processor Visa (NYSE:V) looked stretched. The thesis? Visa is a dominant company with high visibility to steady revenue and profit growth over the next few years. But, all of this growth was already priced into V stock back in July, so near-term upside potential looked limited.
Fast forward four months. Visa stock hasn’t gone anywhere. It was a $180 stock back in mid-July. It’s a $180 stock today in mid-November. The culprit? Valuation. During that stretch, Visa reported back-to-back double beat quarters with strong numbers, and the S&P 500 rose 4%.
So, while the fundamentals underlying V stock have remained favorable over the past few months, the valuation has remained stretched, and that has kept shares stuck in neutral.
Fortunately for bulls, after a four-month sideways stretch, the fundamentals have caught up to the valuation. V stock doesn’t look so stretched anymore.
Is it time for a rally? I think so. The fundamentals and optics here are improving in a way that makes $200 seem like a reachable price tag for V stock within the next few months.
The Optics Are Improving
The optics surrounding V stock are dramatically improving, and these improving optics should provide support for further upside.
In a nutshell, the global economy has been stuck in a synchronized slowdown since January 2018 as escalating geopolitical uncertainty and trade tensions have weighed on investor confidence. But, over the past few months, global trade tensions have eased as the U.S. and China have made significant trade progress. Central banks globally have also been providing fiscal support. This double tailwind has breathed life back into the global economy, which is showing signs of bottoming and reversing course.
As goes global economic activity, so goes Visa stock.
The logic there is simple. When the economy is firing on all cylinders, consumers are spending. When consumers are spending, they are using their payment cards. Visa owns about 50% of the global payment cards market. Thus, if consumers are using their payment cards more, then that means they are using their Visa cards more. The more consumers use their Visa cards, the higher Visa’s revenues, profits and stock price go.
It’s that simple.
As such, so long as the global economy stays in rebound mode, the backdrop will be conducive to Visa stock heading higher.
The Fundamentals Look Good
Importantly, the fundamentals and valuation check out here for Visa stock to finally make a meaningful move higher.
Zooming out, Visa owns about 50% of the global payment cards market, and that market is growing at a fairly steady 10%-12% clip globally. Double-digit market growth will persist, supported by higher non-cash transaction penetration in developed economies and broader uptake of payment cards in developing economies. Visa has very little real competition in this space, so as the market continues to grow at a 10%-12% clip globally, Visa’s volumes and revenues will grow at a similar pace.
Further assuming that Visa continues to grow its expense base at a single-digit rate and buy back shares, then Visa’s earnings per share growth should measure around 12%-15%. Realistically, that pegs Visa’s EPS at around $12.25 by fiscal 2026.
Payment stocks like Visa and Mastercard (NYSE:MA) normally get somewhere between 25-times to 30-times forward earnings multiples. Assuming something at the midpoint, that equates to a fiscal 2025 price target for V stock of over $335. Discounted back by 10% per year, that equates to a fiscal 2020 price target of nearly $210.
Bottom Line on Visa Stock
After a four month stretch of going nowhere, Visa stock looks ready to roar higher. How much higher? The fundamentals point to 15%-plus upside over the next 12 months.
As of this writing, Luke Lango was long V.
