Is This Buffett Favorite a Buy?

The overwhelming shift away from cash transactions has only picked up steam over the past few years. Digital transactions are easier than ever, and credit cards have been viewed as the safer option when making online purchases.

Nearly 60% of the credit and debit cards in use worldwide are Visa (NYSE: V) cards. The company’s dominance has made the credit card processor a staple of many portfolios, including Warren Buffett’s. The billionaire investor currently has a $2.26 billion investment in Visa and has been a longtime shareholder.

The stock has been a winner for Buffett as Visa outperformed the S&P 500 over the past five years. Visa has a 94.5% 5-year return compared to the benchmark index’s 80.8% return. That’s not even including dividends, which the company has consistently increased for over a decade.

The past 12 months haven’t slowed the credit card company’s progress with V share price rising by around 21%. However, the just-released earnings report raised some red flags for investors.

The company blamed slow December and January sales on extreme weather that has hit the US. But there has long been speculation that up-and-coming fintech platforms might soon cut into the company’s market share.

So is Visa a buy or sell?

What Made Visa Stock Go Up?

Visa shares have been on an uphill trajectory since the company’s initial public offering in 2008. That trend accelerated as online shopping gained traction and the migration to digital transactions mushroomed higher since the turn of the decade. After a minor pullback in 2022, Visa resumed its vertical climb.

Even though it is viewed often as a credit card company, Visa doesn’t actually issue any credit. Its cards function as the go-between for lenders and merchants, and Visa earns its revenue from transaction fees charged to the seller.

That business model has been a winner because Visa doesn’t take on the risk of default, and it keeps the company’s margins high (its profit margins average over 50%).

Visa’s success has allowed the company to expand its global reach, including the $1 billion acquisition of Pismo that was finalized in January 2024.

The purchase of the cloud-native Brazilian fintech was a coup for the company because it gives Visa a cutting-edge platform and a larger share of the Latin American market. That deal comes on the heels of news that Visa will buy a majority stake in Prosa, Mexico’s leading payments processor. That deal is expected to close in late 2024.

Will Visa Stock Keep Going Up?

Though there are concerns about lagging winter sales, the company’s earnings report for the 1st quarter of fiscal 2024 (ending December 31) was quite positive. Net revenue of $8.6 billion was 9% higher than the same quarter of 2022. It also beat revenue estimates by 0.9%.

GAAP net income of $4.9 billion rose 17% year-over-year, a testament to the company’s strong margins. Earnings per share came out to $2.39, which was 3.07% better than the analysts expected.

Revenue and earnings beats are nothing new for Visa and represented a continuation of a trend over the past four quarters.

Payments volume increased 8% from the prior year, including a 16% increase in cross-border volume. That latter number excludes transactions that occurred within Europe, and it’s a healthy indicator of Visa’s global brand.

The company reported $21.4 billion in cash and cash equivalents in the quarter, and it even reported a dividend increase. The new quarterly payout will be $0.52 per share, a 0.78% annual dividend yield.

Nonetheless, the December and January sales slowdown initially outweighed the earnings report’s positives and Visa shares were marginally down after the release.

Is Visa Stock a Buy or Sell?

According to analysts, Visa stock is a Buy with a price target of $295 per share, representing upside potential of 11%.

Not a single Sell rating exists on the stock. Out of 39 Wall Street analysts who issued opinions on the stock, 31 rate it as a Buy.

Five of those analysts believe that the stock will continue to outperform the market, and the highest forecast has Visa share price reaching $325 over the coming year, a 19.2% increase from where the stock currently trades. 

There are 8 Hold ratings with the the lowest forecast predicting that Visa shares will drop by 6.5% over the next 12 months and land at $255 per share.

Is Visa Stock Undervalued?

At this point, Wall Street still considers the stock undervalued. Visa has continued to outperform expectations and it’s making acquisitions that will keep it relevant on a global scale. Its short-term winter revenue lag is likely to correct as the weather improves and customers get back outdoors.

The company’s price-to-earnings (P/E) value of 32.91x might give some investors pause, but it’s lower than Visa’s chief competitor, Mastercard, with a P/E of 37.98x. It’s also a lower value than Visa’s average P/E value over the past five years.

Another concern for potential investors has been the company’s competitive moat. Fintech platforms are in no short supply, and there have long been fears that Stripe, Block, and Paypal will eventually seize some of Visa’s market share. Those fears have as yet been unfounded, but are worth monitoring.

Wrap Up

Attributing weaker winter revenue to the weather makes sense, as the company’s leadership reported that sales were the same in cities where the weather was better. Visa shares dropped initially on the news but seem to be bouncing back. Judging from the earnings release itself, there doesn’t appear to be any cause for alarm just yet.

Visa has a commanding market share in the digital payments industry, and the company’s moat seems well intact. Revenue and profits are increasing and continue to beat expectations.

The credit card processor has outperformed the S&P 500 and the company just increased its dividend again. All in all, Visa remains an attractive option for long-term investors.

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