Visa: Growth Trumps Fear Across the Analyst Community
Since its initial public offering in 2008, Visa (V) has been one of the best performing growth stocks in both the financial sector and the broader market, at large. On a split-adjusted basis, Visa’s share price has increased from $11/share at its March 2008 IPO to $216.86/share today. This means that over the 13 years or so that the company’s stock has been publicly traded, its shares have generated a capital gains CAGR of nearly 26%.
What’s more, this doesn’t even factor in the company’s regularly growing dividends. When dividend re-investment is factored into the equation over time, a long-term Visa shareholder is looking at a ~13 year total return CAGR in the 30% area. In other words, investors who were fortunate enough to buy Visa shares back in 2008 have seen their money double every 2.5 years or so since.
But, you didn’t have to be a lucky IPO investor to benefit from Visa’s growth. Since its IPO in 2008, the company has produced double digit earnings-per-share growth in all but 2 of its annual reports (2016 and 2020 were the two down years).
Dave Kovaleski, of The Motley Fool, recently highlighted Visa’s tremendous growth, saying, “It has been an earnings machine, as earnings per share have increased nearly 20% per year over the last 10 years. Investors have seen the stock price increase 28% per year on an annualized basis over the past decade through 2020.”
However, more importantly than that, he continues, “If you've missed out on Visa's fantastic run over the past 10 years, don't dwell on it -- there are a few good reasons why Visa will probably generate double-digit returns over the next decade, too.”
Kovaleski notes that Visa is part of a “virtual duopoly in the credit processing space”, alongside its peer MasterCard. And, he expects for the digital payment processing industry to continue to grow due to its connection with eCommernce.
Regarding eCommerce, Kovaleski says, “In 2023, about 22% of global purchases will be made online, according to projections, and by 2040 that's expected to spike to about 95%.” He concludes that “As the world gradually moves away from cash, Visa stands to benefit as much as any company.” What’s more, his bullish argument isn’t just about sales growth, but more importantly, Visa’s high margins.
Kovaleski highlights Visa’s operating margin, which is roughly 65%, is much higher than its major peers across the payments processing space. He says, “Its main competitor, Mastercard, has a margin of 53% -- which is great but obviously a step below. Discover Financial Services and American Express have operating margins of 26% and 14%, respectively (although they offer other services that cost more to operate), while payment provider PayPal is at 16%.
As exciting as Visa’s strong market position is, the fact is, 2020 was the first year in Visa’s history that the company did not produce annual earnings growth. However, analysts are extremely bullish on the stock’s forward looking prospects as the broader economy recovers coming out of the COVID-19 pandemic. Right now, the consensus analyst estimate for Visa’s 2021 EPS growth rate is 9%. The consensus estimate accelerates to 26% in fiscal 2022 and holds that strong double digit rate in fiscal 2023 as well, where the analyst community is calling for EPS growth of 19%.
Generally speaking, during recessions it’s the economically sensitive financial sector that suffers the most. In a recent article, Sean Williams of The Motley Fool touched upon this, but also noted that Visa is a top pick of his, regardless of the macro economic circumstances. He says, “While it's not uncommon for financial stocks to take it on the chin when market crashes rear their head, payment processor, Visa is one of the best companies investors can buy during any weakness.”
This strong forward growth is why Visa shares have held up fairly well throughout the pandemic period, even though the company experienced a rare growth hiccup. But, short-term growth results aside, Williams notes that Visa controls “53% of all credit card network purchase volume in the U.S. in 2018, which means it's the unquestioned payment processor of choice in the largest economy in the world, by gross domestic product.” This provides investors with a wide and defensible moat.
Williams also demonstrates why Visa is different from so many of its peers in the financial space, highlighting the fact that this company is not in the credit business, but instead, focuses on payment processing. He says, “By avoiding lending, Visa ensures that it's not hit with rising credit and loan delinquencies during inevitable periods of recession. Not having to set aside cash for credit losses is one of the big reasons Visa's profit margin is regularly above 50%.”
A simple way to view Visa’s business model is as an economic toll-booth of sorts. Visa collects a tiny fee every time a transaction is processed within its broad network, allowing the company to generate reliable and high margin sales.
Now, as Anusuya Lahiri of Benzinga points out, there is some potential downside here. In her recent article, she highlights the Department of Justice’s recent anti-trust probe into the business practices of both Visa and MasterCard (MA), noting, “The DOJ’s antitrust division probed into Visa’s possible role in restricting merchants’ ability to route debit-card transactions over cheaper card networks. The probe also inquired into in-store issues.” She says that the “investigation focused on Visa’s possible market domination via unlawful activities.” At this point, there has been no published conclusion to the investigation.
Eric Volkman, of The Motley Fool, published an article on NASDAQ.com a couple of weeks ago, highlighting management’s response to the allegations. Volkman notes that in the company’s press release related to the probe news, Visa says that while it is cooperating with the investigators, it believes that its practices has been above board, saying, "We believe Visa's U.S. debit practices are in compliance with applicable laws." This will likely result in a corporate legal battle for months, if not years. However, the fact of the matter is, DOJ probes present a risk that investors need to factor into the due diligence when attempting to estimate future growth prospects.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Visa shares fell roughly 5% when news of the DOJ probe broke; however, since then, V shares have began to cover, in large part, it appears, due to exciting news surrounding cryptocurrency. Volkman published another piece this week highlighting Visa’s acceptance of cryptocurrency as payments on its network. He says, “Visa's move feeds into its "network of networks" strategy, its ambition to accept a wide variety of monetary sources -- digital included -- for payments within its ecosystem.”
Volkman says that Visa is allowing payments of USD Coin, via the Ethereum blockchain. USD Coin is no Bitcoin, in terms of popularity, but the move by the company provides renewed optimism for growth in the digital payments space, as Volkman points out, “Visa said that it will leverage the USD Coin arrangement to eventually support central bank digital currencies. As the name implies, these are cryptocurrencies developed and distributed by national central banks.”
Daniel Abel, of Altcoin Buzz, recently published an article highlighting Visa’s move into the crypto space as well, quoting Visa’s head of crypto, Cuy Sheffield as saying, “We see increasing demand from consumers across the world to be able to access, hold and use digital currencies and we’re seeing demand from our clients to be able to build products that provide that access for consumers.”
There isn't a single company in the market that doesn’t face risks. This is why equities are considered to be risky assets. However, across the 4 and 5-star analysts that Nobias tracks, the overwhelming consensus related to Visa is a positive one. Our algorithms tracked 24 bullish articles/notes published in recent weeks, compared to just 9 bearish opinions.
In Visa’s case, it appears that the company’s illustrious history and double digit growth prospects continue to drive the bullish thesis. Shares are up 4.27% during the last week alone, pointing towards another potential run at an all-time high for V shares.
Disclosure: Nicholas Ward has a long position in Visa (V) and Master Card (MA). Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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