For the first time in decades, concerns about Visa’s future dominance are affecting its stock price. However, as the company’s earnings report approaches on Wednesday, investors are encouraged to focus on the bigger picture.
Over nearly two decades, Visa, along with Mastercard, has maintained a stronghold on the credit card market, much to the frustration of competitors like American Express and Discover Financial Services. Visa shares have delivered an impressive annual return of 22% over the past 15 years, including reinvested dividends, significantly outperforming the S&P 500 index’s 15% annual return. This stellar performance translates to a remarkable 1,606% gain for Visa shareholders, compared to the S&P 500’s 496% gain during the same period.
However, Visa’s stock has recently encountered some turbulence. The underperformance began during the pandemic and accelerated this year after a federal judge in June rejected a settlement between Visa, Mastercard, and merchants that had been reached in March. The market is concerned that Visa and Mastercard may have to lower the fees they charge businesses, which could impact their profitability. As a result, Visa’s stock has risen only 3.4% this year, trailing the S&P 500 by about 13 percentage points.
Despite these challenges, the current dip in Visa’s stock may present a buying opportunity. J.P. Morgan analyst Tien-tsin Huang acknowledges the various concerns surrounding Visa, including regulatory issues, litigation, market saturation, pricing pressures, and the broader macroeconomic environment. However, he believes the recent underperformance is excessive. “We find these concerns reasonable, even being clear to articulate over the past year that the operating environment has felt notably fragile, but we see the recent underperformance in the stocks as overdone,” Huang writes.
Investors will be closely watching Visa’s upcoming earnings report on July 24 for signs of the company’s underlying strength. The company is expected to report a profit of $2.42 per share, a 12% increase from $2.16 in the same quarter last year, on revenue of $8.9 billion, which would represent a 9.9% increase from $8.1 billion.
Visa has continued to grow transaction volumes as card and digital payments increasingly replace cash and check payments in many countries. Additionally, low-single-digit inflation has slightly increased transaction sizes compared to last year. Furthermore, Visa’s strong cash flow allows it to buy back its stock, reducing the share count from just over 2.1 billion two years ago to 2 billion now, which supports earnings-per-share growth.
There is a good chance Visa will meet Wall Street’s expectations. While some banks, including Wells Fargo and Bank of America, have reported decelerating debt and credit card volumes, TD Cowen analyst Bryan Bergin notes that these volumes remain relatively unchanged from the fourth quarter. He also points out that consumers have shown resilience. “We’re confident that [second-quarter revenue] will land in line, while expecting largely reiterated guidance,” Bergin explains.
Whether Visa exceeds expectations significantly or not, the anticipated results should be sufficient to boost the stock. At its current price of $269, Visa trades at 25 times 12-month forward earnings, down from 28.8 times in July 2019, before the pandemic. While this is more expensive than the S&P 500’s 21.5 times, the current 3.5-point gap is much narrower than the 11-point premium five years ago, indicating that much of the present concerns are already factored into the stock price.
Citigroup analyst Ashwin Shirvaikar believes that the current levels present an attractive buying opportunity. “With the relative multiple at multi-year lows and our view regarding intact fundamentals, current levels present an attractive buying opportunity,” Shirvaikar writes.
While it is important to consider the potential future challenges for Visa, the present moment appears to offer a promising entry point for investors. The upcoming earnings report and the company’s long-term growth prospects could provide a catalyst for the stock to regain its momentum.