The novel coronavirus pandemic is likely to accelerate the push for a cashless economy. Payments processors like Visa (NYSE:V) and Mastercard (NYSE:MA) are the potential beneficiaries in the coming years. Interestingly, both stocks touched 52-week highs in the third week of February. In the market meltdown, V stock has outperformed, losing 18% versus MA stock’s 23% decline from those highs.
Focusing on Visa today as I believe that the stock has upside potential after the recent quarterly results.
Talking about the push for a cashless society, a recent survey in the U.K. noted that 75% of people were using less cash. In addition, 54% avoided the use of cash. Even in the U.S., “merchants are encouraging people not to use cash.”
Another interesting development that deserves mention is China starting trial of a state-run digital currency. Visa also launched a debit card last month that offers bitcoin-denominated rewards. This might just be the first step initiated by Visa to make inroads in the world of digital currency.
Positive Cues from Quarterly Results
Visa recently reported second-quarter results for 2020 with earnings beating expectations. While the company has withdrawn full-year guidance, I believe there are several positives worth noting.
The company ended the quarter with $13 billion in cash and equivalents. The company issued $4 billion in debt post Q2 2020, taking the liquidity buffer to $17 billion. In addition, $5 billion in revolving credit facility remain un-drawn. Simply put, Visa has a robust liquidity position.
Another positive is that the company intends to keep the dividend and share repurchase plan unchanged. Free cash flow is expected to be lower than the company’s earlier plan. However, the company still expects “to generate a very healthy level of free cash flow this year under any scenario.”
This is an indication of a relatively resilient business model even if global growth remains depressed though the year. As an example, online retail sales surged by 74% in March 2020 as compared to the prior year period. E-commerce transactions have the potential to boost growth for Visa.
Wedbush analyst Moshe Katri expects e-commerce volumes to more than double this year. Katri has increased his price target for V stock to $200. This implies a potential upside of 14% from current levels of $175.50.
In the current economic conditions, a potential upside of 14% is attractive for a stock that has a beta of 0.94. In addition, dividends and share repurchase will continue to create value for investors.
Ample Growth Opportunities
For FY2019, Visa reported 55% revenue from international markets. Further, revenue growth from international markets was 13% as compared to FY2018. I believe that the company’s presence outside the United States will translate into sustained growth.
As an example, the company has expanded to more than five million QR points in India. The QR code to accept digital payments is also live in Africa, Eastern Europe, the Middle East and other parts of Asia. This will help the company expand in under-penetrated markets.
The company has also been on an expansion spree through the inorganic growth route. Last year, Visa acquired Earthport, which is the largest independent account clearing house. The acquisition has enabled the company to reach 99% of world’s banked population in 88 countries.
More recently, Visa acquired Plaid for a consideration of $5.3 billion. According to Visa CEO Al Kelly, the acquisition is a “long-term play and will position Visa for the next decade. The CEO further added that Plaid “will help expand the company’s own total addressable market and relationships with fintech companies.”
Therefore, be it making inroads in the cryptocurrency market or working closely with fintech companies, Visa intends to stay ahead of the curve.
Concluding Thoughts on V Stock
V stock has been among the more resilient names in the recent market meltdown. While the company’s business will be affected through the year, free cash flows will remain strong. This makes the stock attractive.
Further, international growth will remain strong in the coming years and will keep cash flows robust. Focus on growth of digital, cashless payments globally is also likely to yield positive results.
Overall, V stock is worth considering for the portfolio. I believe that the worst related to the current health crisis might already be discounted in the stock.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.