Visa Inc (NYSE:V) is one of the largest companies in the U.S. – it’s a component of the S&P 500 and Dow Jones Industrial Average, and its global processing network’s 65,000 transactions per second is used as a viability measurement for emerging crypto and digital currencies.
Being an industry leader in payment processing helped the company recover from the coronavirus pandemic relatively easily. Whether online or off, Visa’s financial network is at the core, and it collects transaction fees from all of it.
But with the company nearing historic high values and the economy heading for recession, is Visa stock overvalued?
Financial stocks in general are often preferred by long-term investors. Visa’s biggest strength is in its legacy network that’s already deeply integrated into the global financial system. But it doesn’t have a clear path ahead – a European Commission aims to stop the region’s reliance on Visa and rival Mastercard Inc (NYSE:MA).
This could greatly hamper revenues, and it’s happening at a time when thousands of cryptocurrency projects are lining up to take its place. Let’s take a look at Visa’s receipts to see if it’s a worthy investment for the long-term.
Why Visa Stock Went Up
The payment processing space is essentially a duopoly between rivals Visa and Mastercard, who together account for 69.5 percent of all global card transactions.
This includes all forms of payment cards, including credit, debit, EBT, and even prepaid gift cards. This helped it continue its dominance as the world entered a social distancing age, where ecommerce, deliveries, and contactless payments trended upwards.
While it experienced a 37 percent decline during the coronavirus crash, it quickly recovered to its pre-Covid levels.
And because it doesn’t actually issue the cards, Visa has protection that competitors like American Express and Discover Financial Services don’t. It makes money based on transaction volumes, and it’s of no concern to the company whether the balances are ever paid off, a major risk the card issuers face as the economy faces a recession.
Despite its wins, the company still lost 23 percent from its earnings during the spring of 2020. This is largely because of the drop in travel, as large live events were cancelled across the board and consumer spending took a dip.
With the economy on track to recover from the coronavirus pandemic, let’s check out Visa’s financials to understand how it stands.
Visa Financials Are Impressive
Visa’s most recent annual report shows it targeting a $15 trillion to $20 trillion range of consumer spending that’s handled through its networks. This is because of the pandemic pushing people away from using traditional cash and checks.
It has a 45% market share, but revenues still dropped 17.20% to $4.84 billion during the second quarter of 2020.
Its 64.78% pretax margins mean the company’s non-GAAP income was $2.3 billion, or $1.07 per share for the June quarter.
Cross-border payments took the biggest hit for the quarter, experiencing a 37% decline, however both payments volume and processed transactions also experienced losses.
This kept the company from providing any forecasts for the full year’s financial outlook, although it still had over $17.2 billion cash on hand as of June 30.
Analysts have high expectations for the company’s upcoming Q4 fiscal year report to determine for sure if the company still has value.
Is Visa Valuation Too High?
Visa’s stock price has been hovering around $200 per share for the majority of 2020. This represents an all-time high market cap of over $420 billion. The company also raised its quarterly dividend to $0.30 per share, or a $1.20 annual yield.
About half of Visa’s stock is owned by mutual funds, and this is largely because of its inclusion in both the DJIA and S&P 500.
In fact, Visa is one of the companies that helped these indices rally from the coronavirus pandemic. But that’s not guaranteed to last beyond the 2020 holiday season.
The economy is experiencing chaos that hasn’t been seen in generations – record high unemployment and companies closing don’t seem to match with record high prices in the stock market.
And Visa is facing stiff competition, especially in other regions of the world where companies are spending the high entry costs to build their own proprietary payment networks.
None of them are anywhere near the size of Visa alone, but the sum of all of them can have a serious effect on the company’s bottom line, especially with players like PayPal, Square, and Stripe pushing ahead in fintech.
Still, analysts agree $200 may be a discount for Visa shares, especially for long-term investors.
Will Visa Stock Drop?
There’s a chance Visa will drop, but it’s fully aware of the problems and is addressing them head on. It hedged its bets in Europe by investing in Global Processing Services (GPS), a U.K.-based fintech company that may take its place in the EU. It’s also working on similar deals in Asia to help it broaden its available revenue streams.
The company is also invested in over a dozen cryptocurrency projects and is working on ways to partner with these startups.
It acquired Plaid for $5.3 billion to connect users’ bank accounts to services like Venmo and Acorns, and it’s working with crypto lender Cred to expand even further into the cryptocurrency space.
These moves will help Visa continue to squeeze out profits, even if it is eventually dethroned. In other words, it may lose value, but it’s unlikely to go out of business in your lifetime.
Is Visa Stock Overvalued? The Bottom Line
Visa is the largest payment processor on the planet, and that’s both a gift and a curse. The company experienced only a mild drop compared to the greater market during the coronavirus pandemic. This is because it facilitates payments between banks and retailers without taking on the burden of whether the customer actually pays. This strategy paid off during its 2020 recovery, but it still lost revenue and has several obstacles in its path.
Still, leadership is focused on both R&D and M&A to help it cover its bases in the digital payments space. Everything from mobile payments to contactless payments are becoming more commonplace around the globe.
Whether Visa stays at the top of the heap is irrelevant, because its infrastructure is built and heavily integrated into the financial system. If you’re looking for a long-term investment play, Visa may be the way to go.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.