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Visa: A Fantastic Business With A Premium Valuation (NYSE:V)

VISA Credit Card Wallet
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investment thesis

A visa (V) is a company that needs no introduction. As the world’s largest credit card company, many of us use Visa debit or credit cards and it’s been a long time since. It’s a great business with huge margins, but the valuation is a little rich with current prices in my opinion. With a market capitalization of over $450 billion, Visa is a mature cash-printing company, but I’m not sure it will be enough to provide double-digit returns for new investors without the continued multi-scaling. There is also more uncertainty in the financial space looking into the next decade with the rise of fintech, cryptocurrency, and other rapidly evolving technologies into finance.

the work

The visa has been an integral part of the daily lives of many Americans, as well as people around the world. Just over half of Visa’s revenue for fiscal year 2021 came from international sources. Most of Visa’s revenue comes from data processing and services revenue, but a large portion comes from international transactions and other sources.

Source: Annual Report

Not only does Visa generate a great deal of revenue, but the company also has some of the best margins out there. With operating margins of over 65% and net margins of over 51% for 2021, Visa is printing cash faster than the vast majority of companies out there. This is partly due to the nature of the business model, but Visa’s margins are still better than its nearest competitorMasterCard (Master). Mastercard has an operating margin of 53% and a net margin of 46% for the first nine months of 2021. Don’t get me wrong, these margins indicate quality business, but Visa is clearly the best breed company when it comes to credit cards and transactions.

Source: Annual Report

As an international company, Visa is part of a massive number of transactions each year, with close to 165 billion transactions worth $10.4 trillion in 2021. Curiosity got the better of me and I had to add the hack below.

Source: the author

I can’t find any bugs or weaknesses in the work to be completely honest. If you add all these factors together, Visa is clearly an outstanding company. This is why the market has always assigned the stock to a premium multiplier.

evaluation

I have watched over the past couple of years as the markets have continued to rally on the easy money, not ending massive buybacks and speculation. While there are certainly pockets in the market that carry more foamy valuations than Visa is currently doing, I’m not ready to start buying Visa stock just yet. With more than 35 times mixed earnings and a market capitalization of over $450 billion, I find it hard to justify paying for Visa’s future growth. Visa will continue to grow and grow rapidly, but I don’t find the stock attractive at the moment.

Source: quick graphs

If the stock drops below $180 or $185, I will probably start buying. That would be just under 30 times earnings, and I’d start buying aggressively if we saw the stock drop to $150. Unfortunately, I’m not sure if we’ll see stocks drop below $200 unless we see broader weakness in the market. Every investor is different, but I am very selective when it comes to valuation, especially for huge stocks. The other problem is that Visa doesn’t do much to get excited about when it comes to earnings.

Dividends and buybacks

Visa is currently generating a whopping 0.67% return. Sure, it’s better than a savings account, but nothing that gets income investors excited. Visa raised its dividend from $0.32 to $0.375 for the start of fiscal 2022, and the payout ratio is low, so investors can expect double-digit earnings growth for the foreseeable future.

Repurchases are the other biggest part of Visa’s capital return program. Personally, if I were a shareholder, I’d like to see bigger dividend hikes, especially when buybacks are done with these valuations. Visa repurchased $8.7 billion worth of stock in 2021 at an average price of $219.03. On September 30, Visa had $4.8 billion remaining on its existing repurchase authorization. In the last couple of years they have authorized additional buybacks in January and I believe this pattern will continue this year.

conclusion

The visa is definitely a great job. However, it appears to me that it is currently trading above fair price. I also wonder what the future looks like for Visa. With the rapid development of new technology disrupting the financial field, I’m not sure what role Visa will play in 5-10 years. I’m no computer wizard (I have people for that), but there is a lot of uncertainty on the horizon when it comes to the intersection between finance and technology.

Another part that makes me hesitant to start a position in Visa is the small dividend yield and the buy back program implemented with premium ratings. I think we’ll continue to see rapid dividend growth, but the starting yield is so low that income-seeking investors have to look elsewhere. Visa is a premium company with an excellent valuation and I think it would be wise for discerning investors to wait for a major pullback or look elsewhere for more attractive opportunities.

I’d be excited to hear your thoughts. Feel free to leave a comment below.

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