Robust Visa Stock Looks Volatile Ahead of Earnings

Although Visa enjoys high margins and and strong pricing power, V stock is likely to be choppy around the earnings release

The world’s largest retail electronic payments network, Visa (NYSE:V), will report Q2 FY 2020 earnings on Apr. 30 after market close. Year-to-date, V stock is down about 8%. But that number tells only half the story.

V Stock May Look Tempting Right Now, but There Are Rocky Times Ahead
Source: Teerawit Chankowet /

On March 23, Visa hit a 52-week low of $133.93. Now, V stock is hovering around $174. Put another way, over the past five weeks, the price is up about 30%.

A large number of investors are wondering if they can relax into this seemingly V-shaped recovery, not only in Visa but other companies as well. Long-term I believe Visa belongs to a diversified portfolio. In the short run, however, I expect stomach-churning market volatility in broader markets and many stocks to continue.

Therefore, if you are not yet a shareholder, you may want to wait for the release of quarterly results before committing new capital to V stock. Long-term investors with a two-to-three-year horizon may regard any dip in price, especially toward $160 or lower, as opportunity to buy into the shares. Let’s delve into the analysis.

Visa Leads the Industry

Visa is a quality blue-chip company with a $370 billion market cap. It operates within the electronics payments sector, a group that does not issue credit cards or lend money. Instead, it operates as an “intermediary,” charging a fee on each of the 150 million transactions its network handles every day.

Davis Stearns of University of Edinburgh highlights how “Visa transformed the disintegrated, paper-based credit card systems of the 1960s into the unified, electronic value exchange system we know today.”

Currently, the company has three main revenue segments:

  • Service revenues (for services provided to card issuers for the use of Visa products);
  • Data processing revenues (fees Visa collects for the authorization, settlement, or clearing); and
  • International transaction revenues (for cross-border and currency conversion transactions).

As one of the major credit and debit card processors, Visa has strong pricing power and a good profit margin that stands at over 54%. In fact, Visa and long-time rival Mastercard (NYSE:MA) can be said to have a duopoly in the cards network sector.

Both companies collect transaction fees without bearing credit risk and control a majority of the digital payment infrastructure. And there doesn’t seem to be much threat to the dominance of either company.

In recent years, Visa has also been looking to benefit from the increased use of mobile payments. The most widely used transaction methods include contactless payments without entering the credit card PIN number at the point-of-sale or using a smartphone to pay a merchant or even a person such as a friend or family member, i.e., peer-to-peer (P2P) payments. Analysts expect the global market to reach $4.5 trillion by 2023.

However, since the start of the Covid-19 pandemic, investors have been worried about the outlook for the electronics payments industry.

The Pandemic and Visa

The coronavirus outbreak has changed the way we live and work almost overnight. Recent research by Andrew Atkeson of the National Bureau of Economic Research in Cambridge, MA, discusses various health models on the potential progression of the epidemic.

He concludes that “the evolution of Covid-19 in the United States (and likely worldwide) is that it will likely require severe social distancing measures imposed for an entire year or even 18 months (until a vaccine can be developed) to avoid severe public health consequences.”

Many analysts agree that the longer the various degrees of lockdown continue, the more uncertainty we are likely to have regarding the economy, not only in the U.S. but also globally. As long as the pandemic continues, consumers, who may also be deeply concerned about their own jobs, will spend less. Thus Visa cannot potentially be immune from the economic shutdown.

Revenues, profits, as well as cash flows of many businesses are being adversely affected by the current pandemic. In early March, Visa management said that the group will likely take between a 2.5%-3.5% revenue hit in the fiscal second quarter. And in mid-April, Jefferies downgraded both V and MA stocks.

I’d like to also remind InvestorPlace readers that Mastercard is scheduled to report earnings on Apr. 29 before market open. The market will pay close attention what Mastercard management says about the potential effects of the coronavirus outbreak on the industry. In case of a dire forecast for the rest of the year, V stock may also be adversely affected.

What to Expect From Q2 Earnings

In the past, Visa has regularly shown profitability, high margins, robust cash flow and healthy financial metrics. And that has fuelled the V stock to new highs quarter after quarter. For example, on Feb. 19 the shares hit an all-time high of $214.17.

When Visa reported Q1 results in January, CEO Alfred Kelly said “Our fiscal first quarter 2020 reflected stable and robust business growth around the world. We continue to have great success in building and renewing partnerships and growing our acceptance network.”

In Q1, Visa’s three main segments reported strong revenues:

  • Service revenues (about $2.5 billion);
  • Data processing revenues (about $2.8 billion); and
  • International transaction revenues (about $2.0 billion).

On April 30, the Street will compare these metrics with the upcoming Q2 numbers. Analysts would like to see how soon it will be possible to look beyond the pandemic. As a result, I expect increased volatility around the earnings release date.

At present, the group’s forward P/E and P/S ratios stand around 32 and 15 respectively. Both numbers are on the rich-valuation end of the spectrum, even for a robust company like Visa. Value-seeking investors may not necessarily find these numbers attractive.

Could it be that any potential quarterly good news from the payments giant is already priced into V stock? If you also think so, then I’d encourage you to first study the upcoming second-quarter results before buying into the share price.

As the full earnings season gets under way, we are all ready to hear strong quarterly results and positive forward looking statements. Renewed confidence in the economy will help most stocks including V. Yet how encouraging is the recent market rally?

The Bottom Line on V Stock

Are you currently an investor in V stock who has also participated in the recent increase in price? Then, you may want to ring the cash register and realize some of the gains. While long-term investors would like to see the price go and stay over $180, short-term traders will likely keep it between $160 and $170.

I would consider investing in V stock if the price goes toward $160 or below. Meanwhile long-term shareholders would enjoy a current dividend yield of 0.7%.

Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a six-week time horizon. An ATM covered call position with June 19 expiry would offer you some downside protection. It would also enable you to participate in a potential up move.

Finally, those investors who would like some Visa exposure but are nervous about the prospects for the year may consider buying into an exchange-traded fund that has V stock as a holding.

Examples such ETFs would include the iShares U.S. Financial Services ETF (NYSEARCA:IYG), the ETFMG Prime Mobile Payments ETF (NYSEARCA:IPAY) or the Invesco Dividend Achievers ETF (NASDAQ:PFM).

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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