Are people spending money? And if so, where and how are they spending it? These are crucial questions that must be addressed if you’re considering a position in Visa (NYSE:V) stock.
The company recently released mixed earnings data for Visa’s second fiscal quarter. “Mixed” means that it’s not all good news, which is understandable since the spread of the novel coronavirus disrupted people’s ability and willingness to spend money.
Mainly due to the effects of the coronavirus, Visa admitted that the company observed “significant deterioration” in spending volume near the end of March.
If that observation is enough to scare you away from taking a position in V stock, you might want to reconsider. It’s undeniable that Visa depends on spending volume, but some key categories actually showed resilience during the coronavirus crisis.
Not So Bad After All
There’s no point in denying the harsh truth of the matter. Through April 28, Visa’s U.S.-based payment volumes declined by 19%. So there’s the “significant deterioration” alluded to earlier.
Still, given the widespread shelter-in-place mandates, perhaps the decline could have been much worse than 19%. Given the lurid headlines about the state of the economy, an argument can be made that Visa’s quarterly payment volumes held up fairly well in the U.S.
What about the other relevant fiscal data? Investors in V stock might be surprised to discover a number of encouraging findings. For the company’s second fiscal quarter, Visa reported $1.39 per share in earnings.
That’s nearly 3% above what the analysts were projecting. It also represents a 9% year-over-year improvement in quarterly per-share earnings.
Visa’s quarterly net operating revenues were also impressive at $5.9 billion. That result beat the analysts’ expectations by 1.78% and furthermore indicated a year-over-year increase of 8%.
Breaking Down the Spending
But again, lest we forget, there was “significant deterioration” in spending. Or was there? Maybe spending didn’t truly deteriorate, but only shifted. Perhaps people are just spending differently.
Visa Vice Chairman and CFO Vasant M. Prabhu basically acknowledged this thesis as he noted “significant differences in how lockdowns have been impacting spend categories.” Prabhu then observed that “1/5 of U.S. payments volume is food and drugstores along with Walmart, Costco and Target.”
This makes sense since, as you probably recall, folks have been loading up on essential items lately. In any case, Prabhu reported that this category was “up approximately 20% in April.”
Prabhu added that “all this growth is coming from online spending, up over 100% in the last 2 weeks of April, assisted by the adoption of curbside pickup and delivery.” Thus, we can detect a trend of online spending pickup up some of the slack in a time when overall spending has declined.
Moreover, Prabhu stated that “categories that are less discretionary like telecom, utilities, insurance and business supplies and equipment … are holding up relatively well.” That shouldn’t be very surprising since economic hardship can lead to a shift from luxuries to necessities.
It’s also important to understand not just what people are spending their money, but how they’re spending it. As Chairman and CEO Alfred Francis Kelly explains, “tap to pay” is quickly becoming a leading-edge payment methodology and Visa is aggressively pursuing it:
“On the merchant side, a large grocery chain recently rolled out tap to pay to more than 1,000 stores. So now 9 of the top 10 grocery stores are enabled for tap to pay. At the end of the second quarter, almost 60% of face-to-face transactions excluding the United States were tap to pay, and tap-to-pay transactions grew over 40% year-over-year.”
Clearly, “tap to pay” is serious business for Visa. This is a payments-processing technology with implications beyond grocery-store spending. For the time being, though, it’s fair to say that 40% is an outstanding rate of year-over-year growth.
The Takeaway on V Stock
Visa was brutally honest in acknowledging a “significant deterioration” in spending. Taking a closer look at the data will provide some clarification, however. Maybe the “deterioration” is really just a shift in spending patterns. And maybe V stock, through all of these changes, will do just fine.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.