While the novel coronavirus pandemic has resulted in several sectors getting hammered, there are industries that are gaining due to the crisis as well. Biotech stocks are enjoying a historic bull run and tech stocks are also doing well, as people shift their work online to get ahead of the curve. That’s why Visa (NYSE:V) seems like a safe bet right now, especially since V stock had heated up.
A fintech giant, it lost a lot of value at the height of the pandemic. Panic-induced selling reduced per share prices to under $136 a pop in March, an absolute steal. However, share prices have since recovered, and V stock is trading under $200. That is a bit to steep for my liking, but it’s clear the market is bullish regarding the company’s prospects.
The recently-completed quarter was the first time in a while that volumes decreased for Visa. That trend is likely to continue because we are already talking of a second Covid-19 wave.
Retail bankruptcies also tell us that it will take time for demand to recover to pre-pandemic levels. Meanwhile, lawmakers are busy drafting a next coronavirus stimulus bill. While that is great, since it means more stimulus money to spend, one wonders how long Congress can keep this going.
Considering these factors, I would suggest waiting for V stock to cool off before adding more to your portfolio.
V Stock Is Overvalued
It’s tough to justify the premium valuation at which Visa is trading at the moment. Although the bottom line for the company has been expanding with each successive year, shares are trading close to $200 in the middle of a pandemic. I guess you could chalk that up to Visa doing better than expected and investors already pricing in a recovery before it occurs.
Revenues in the recently-completed quarter came in at $4.84 billion, a miss of $10.30 million. The troubling thing was that although revenues fell by 17%, operating expenses decreased by just 5%. Effective cost management has become a key talking point during this pandemic. It will be a crucial area that Visa will need to look into in the forthcoming quarter. Earnings per share were $1.06, dropping 22% from the year-ago figure of $1.37 but beating analyst estimates of $1.04.
Visa also repurchased a lot of stock in the quarter, buying back $0.9 billion of shares. Although it may seem a puzzling strategy, the company was sitting on approximately $13.90 billion in cash at the end of the quarter. When you take things into context, the amount set aside for share repurchases doesn’t seem like a lot.
Analyst estimates suggest that 2021 will be a year of recovery, with revenues rising marginally above 2019 levels. The company is expected to trade on high multiples until 2021, as per the estimates. However, I believe if the Q4 figures remain sluggish and the pandemic situation doesn’t improve substantially by the fall, Visa could be in for a rough quarter. Shares will reflect these issues and that may be the time an attractive entry point could present itself.
What Makes Visa Different?
One of the primary reasons why Visa is such a safe investment is because of the company’s focus on innovation and its unique business model.
More and more people are discovering the importance of cashless transactions in the current landscape. That will likely be a growing trend as we move forward, and Visa stands to benefits immensely.
Countries the world over are swiftly moving to remove hurdles in online transactions. The legislation that is coming in is to make sure the transactions are safe, and the data is protected.
Even there, Visa has an advantage over the competition due to its sheer size. While other companies wanting to get into the mix will have to go through a lot of legislation to get up and running, Visa will not have this issue, creating a barrier of entry for new firms.
My Final Word
Covid-19 will likely cast a long shadow over Visa’s operations in the forthcoming quarter. However, in the long run, V stock remains a safe investment because of increased usage of its products as more people go cashless. All signs point to a tough fiscal Q4 but that’s a given with the virus situation. Moving forward, volumes will only rise with time and that’s why shares are trading at a premium.
According to my calculations, V stock has a fair value of $140.52 per share, an almost 40% discount to the current trading price. The consensus 12-month price target for shares is $221 per share. I believe that is a bit conservative, considering the pent up demand in the market.
V stock is a buy for me. But wait for it to drop to around $185 before adding more to your portfolio.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. As of this writing, he does not directly own the securities mentioned above.