Thanks to the novel coronavirus severely reducing consumer spending over the past month, payment processing stocks Visa (NYSE:V) and Mastercard (NYSE:MA) have taken it on the chin. V stock and Mastercard’s year-to-date total returns are -11.1% and -13.6%, respectively.
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns $1.8 billion of Visa and $1.3 billion of Mastercard. They are the holding company’s 15th- and 19th-largest equity holdings.
Clearly, Warren Buffett likes both of these established fintech players. The question is whether you should too.
You Should Buy V Stock
One of the biggest reasons to buy Visa stock is the fact that it has the financial clout necessary to make things happen in the fintech arena. Whether it be through organic growth or M&A activity, Visa CEO Al Kelly is confident that it can make a huge contribution to the digitalization of the financial services industry.
During the company’s annual investor day presentation in February, Kelly outlined the company’s current strategy, which is two-fold: accelerating its revenue growth and fortifying the key pieces of its business model.
From a traditional perspective, the company continues to grow by adding new customers to the Visa network. That’s an ongoing process. However, that’s not something that’s going to explode its growth overnight. It’s going to be gradual.
Where the company can make big inroads is through digital payments.
“There’s still so much room to grow in consumer payments. You’ll see clearly today that there are still many consumers to reach, and there are still enormous opportunity to move consumers to electronic and digital payments,” Kelly stated February 11.
“Equally, on the other side of this two-sided model, there are a tremendous amount of sellers to bring on to our network.”
Beyond consumer payments, Kelly believes that it has just scratched the surface when it comes to new sources of payment and money movement through initiatives such as Visa Direct and B2B Connect. The opportunities are 10 times greater than those found in the consumer payments part of its business.
Lastly, the company believes that it can also leverage its strengths to provide its customers with more value-added services, which come with much higher margins.
Visa President Ryan McInerney explained the importance of value-added services at its investor day. He said:
Value-added services are an extension of our core business. They represent a significant opportunity for us to, one, help our clients grow their businesses, often resulting in additional growth for our core business; two, deepen our client relationships, which, this then gives clients more reasons to want to keep doing business with Visa; and three, deliver new sources of revenue for our business.
If you read the entire transcript, it’s hard not to be excited about Visa’s future. However, it is new flows of money that have Kelly stoked.
By expanding its Network of Networks to capture the movement of money between individuals, businesses, and governments, Visa has a realistic opportunity to grab a significant share of the $185 trillion in new flows of global money movement each year.
That said, Mastercard, PayPal (NASDAQ:PYPL), Square (NYSE:SQ), and all the other payment processing companies are equally aware of how lucrative this market will be. It’s not a slam dunk.
You Should Wait
It seems as though the odds of a recession change each day based on what we hear about the coronavirus. As I write this, the markets have been on a bit of a run higher as investors see the light at the end of the tunnel. All it takes, however, to send stocks scurrying backward, is terrible news from one of the nation’s hot spots.
In mid-March, InvestorPlace’s Ian Cooper felt Visa’s lowered guidance — on March 2, Visa lowered its expected revenue for the quarter down 2.5-3.5 percentage points from its January 30 outlook — was way too optimistic.
Cooper quoted Piper Sandler analyst Christopher Donat, suggesting that the virus’ spread to Europe and North America would affect both cross-border activity and domestic spending.
For this reason, my colleague argued investors would get a better buying opportunity as the coronavirus’ deadly effects took hold.
Since Copper’s article on March 19, Visa stock rose by 15%. In the short term, I’m not sure you’ll be able to buy V stock at $140, barring a collapse of recent momentum.
However, should we get more bad news out of New York or elsewhere, I could see it dropping to $160 at some point.
The Bottom Line on V Stock
While I believe Visa is an excellent long-term hold, I have to agree with Cooper. You will get an opportunity to buy Visa at a lower price over the next few months.
Why? I just don’t see the bear market running out of steam until later in 2020 or into 2021.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
