When it comes payments processor Visa (NYSE:V), the bull thesis on Visa stock in 2020 is fairly simple.
In 2018 and 2019, amid a mixed bag of headwinds and tailwinds, Visa reported steady double-digit revenue and profit growth, and Visa stock consequently rose 15% in 2018 and 40% in 2019. Now, in 2020, that mixed bag of headwinds and tailwinds is full of tailwinds only. Trade tensions and monetary policy across the globe are concurrently easing. Economic activity is rebounding. So is consumer confidence, and consumer spending trends. Meanwhile, the secular payment cards pivot remains vigorous.
In other words, the fundamental backdrop for Visa stock was mixed in 2018/2019 and shares still roared higher. In 2020, the backdrop is much improved. Naturally, Visa stock should rally in 2020 too.
It will. Sure, valuation friction is something to note. But overvaluation isn’t a big problem for Visa stock yet, and the current valuation actually leaves room for significant upside in 2020.
Broadly, then, Visa stock looks ready to do this year what it has done for the past several years, and that is go higher.
Visa’s Tailwinds Are Strengthening
The tailwinds underpinning Visa stock are materially strengthening as we head into 2020.
The concurrent and sustained easing of global trade tensions and global monetary policies over the past few months has set the global economy up for a strong rebound in 2020 after slowing throughout 2018 and 2019. This rebound will have broad implications, one of them being increased consumer confidence, because consumers tend to get more confident when labor markets are healthy, stocks are moving higher, borrowing conditions are favorable, and recession chatter is muted (all of which will happen in 2020).
It’s also true that consumer spending trends tend to pick up in election years, which is exactly what we have in 2020.
At the same time, as consumers do accelerate their spending habits in 2020, they will more frequently use payment cards to spend, given the uptick in online shopping and proliferation of cashless restaurants and merchants.
Broadly, then, consumers around the globe will use their payment cards more in 2020. That’s great news for Visa, because they own 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, which means that Visa’s revenues should keep ticking higher.
At the same time, steady demand drivers will allow Visa to keep expense growth down. On top of sustained big revenue growth, relatively muted expense growth will pave the path for further margin expansion. Big revenue growth plus margin expansion equals even bigger profit growth for Visa in 2020.
Visa Stock Can Go Higher
Behind sustained big profit growth, Visa stock can and will go higher in 2020.
The one thing that held back Visa stock in mid-2019 was valuation friction. But that valuation friction has now passed. That is, Visa stock today trades at 31-times forward earnings, about 10% below the valuation highs the stock was trading at in mid-2019.
From here, the numbers say that V stock will go higher.
Those numbers are as follows. The global payment cards market is growing at a steady 10% to 12% clip globally. Visa owns about 50% of that market. It is unlikely that the payment cards market slows much anytime soon, as the “cash is history” trend sweeps across the globe over the next few years, propelled by a rise in online shopping. It is also unlikely that Visa loses much share in this market, because the company can continue to leverage its unparalleled size to offer the best payment card options out there.
Consequently, Visa will sustain double-digit revenue growth for the foreseeable future. Expenses have been growing at a fairly steady high-single-digit rate. This pace of expense growth should persist. If it does, then Visa’s profit margins will expand on top of double-digit revenue growth, paving the path of low- to mid-teens profit growth.
Assuming so, my modeling pegs $12.50 as an achievable earnings per share target for Visa by fiscal 2026. Based on a historically average 27.5-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for Visa stock of over $210.
Bottom Line on V Stock
Visa stock is a consistent winner, thanks to steady consumer spending and payment card adoption tailwinds. Indeed, in every year except one over the past decade, Visa stock has reported positive annual returns. In all but one of those up years, Visa stock rose by more than 10%.
It looks like 2020 will be a continuation of this trend. Thanks to strengthening tailwinds and a favorable valuation, Visa stock is primed to rise more than 10% yet again this year.
As of this writing, Luke Lango was long V.
