U.S. stocks have plunged nearly 20% in about a month on fears that the coronavirus from China will materially slow economic activity and could tip the global economy into a recession. Very few stocks are being spared in this selloff. Even traditionally strong payments stocks like Visa (NYSE:V) stock have tumbled.
From its mid-February highs, V stock has shed over 20%.
When it comes to this selloff of Visa stock, there are two important truths.
First, as long as coronavirus hysteria dominates the minds of consumers and investors, Visa stock will keep dropping. Secondly, once coronavirus hysteria passes, Visa stock will rebound with significant velocity.
So buying the dip of Visa stock is the smart move, but only once fears about the coronavirus pass. It remains unclear when those fears will pass, and as long as this lack of clarity persists, the stock won’t bounce back.
Coronavirus Hysteria Will Hurt Visa
At first, the coronavirus outbreak was largely contained to China. When the virus was only circulating there, Visa had to adjust its second-quarter revenue growth rate guidance lower by about three percentage points, citing a drop in cross-border business in Asia and lower travel spending.
Now the virus is a global problem impacting not just China, but almost every country around the world.
Naturally, Visa’s cross-border business will take a hit across the globe, as consumers around the world choose to stay at home more and reduce their spending. In that world, Visa’s growth will drop. Its revenue and profits may even fall to 0% for a few weeks.
Against that backdrop, Visa stock won’t work. It is a growth stock (traditionally its revenue increases 10%-plus annually) with a growth valuation of 28 times its forward earnings. The company needs to sustain 10%-plus revenue growth in order for the stock to rise.
As long as coronavirus hysteria forces consumers to curtail their spending, Visa won’t generate 10%-plus revenue growth and Visa stock won’t head higher.
Visa Stock Will Bounce Back
In the long run, Visa stock will bounce back from the coronavirus selloff.
That’s because, as big and as scary as COVID-19 is, it’s a temporary problem. Within a few months, strict quarantining slowed the virus’ spread in South Korea and China. Warmer weather should also help stop the virus from spreading in April or May. Even further, multiple companies have developed potential vaccines, and it’s likely that by 2021, a treatment for the virus will be widely available.
All in all, then, I think it’s quite likely that by summer, the coronavirus outbreak in the U.S. — and across the globe — will be largely under control.
If so, consumer spending trends will rebound tremendously, supported by tons of fiscal and monetary stimulus. That rebound in consumer spending will cause Visa’s revenue growth rates to jump back into double-digit-percentage territory. Rebounding growth will lead to a rebounding stock, and Visa stock could very easily march back towards the $200 level in a hurry.
The Bottom Line on V Stock
At some point, the decline of Visa stock will become a buying opportunity because COVID-19 is a temporary problem, and Visa is a long-term winner.
But I don’t think we are at that point yet. Instead, it feels like there will be more more negative news ahead on the coronavirus front. As long as the headlines remain negative — and the virus keeps spreading at an exponential rate globally — Visa stock will struggle to rebound.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own any positions in any of the aforementioned securities.