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Visa Stock: Beware This Rally (NYSE:V)

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Payments giant Visa (NYSE: V) It has proven to be a company that has seen a lasting impact from the pandemic, which I’ll be honest and say I wouldn’t have thought about in the early stages of the pandemic. However, even today, Visa is still struggling with certain parts of its business, while others have recovered and are helping to offset the weakness. However, with the recovery still largely and patchy, but the stock hitting new highs, I see it as overblown.

Source: StockCharts

But before we get to that, I’m also very cautious on the chart as well, despite the fact that the stock made a new high. In fact, last Friday’s close was a new all-time closing high, barely surpassing the old closing high of $237 that appeared in April. This is a bullish signal, but you want to see confirmation of this week’s strong price action to confirm the breakout.

On the upside, there is trendline support outlined in blue from the current high that has been tested three times, all with success. However, the slope of the line is very steep which means the rally must continue pretty much immediately, or else the trendline will be broken. This will be part of the confirmation of the bullish price action (or breach) that will occur this week or next.

On the non-bullish side, the assembly/distribution line looks very poor, and indicates that this rally has a lot of sellers. To be fair, the stock hasn’t moved much despite the fact that it made a new high, so this probably isn’t surprising. But this A/D line is very weak and does not seem to support a continuation of this rally for any meaningful period of time.

The same can be said for the momentum indicators, as both failed to confirm the recent rally, and then a strong negative divergence was seen with the most recent rally. To illustrate this, I have illustrated a flat line in the PPO, followed by a descending line, which shows, respectively, the failure of the previous top confirmed by increasing momentum, and then the last high of a big rally drop The momentum accompanies the new rally. When the stock makes a new high on momentum that is significantly weaker than the previous high, it often indicates that the rally is tired. It certainly seems to me that Visa’s current ascent is tiring, and therefore, likely doesn’t have much to go.

We’ll see, but at this point, I don’t see the bullish move in any way in its early stages. On a pullback, look for support at $219/$220, which was resistance for several months but turned into support on the recent pullback. who – which Must be an area where stocks bounce; If that fails, there is a decent support at ~$209, but the bottom line is that I see this rally much closer to its end than its beginning.

The underlying concerns remain

My cautious stance on Visa is due in large part to all the issues I see on the chart, but this company faces some fundamental challenges as well. Don’t get me wrong during normal times, the model this company has is awesome. It acts as a toll booth on commerce, taking its fees by a very high margin for the daily purchases made by consumers and businesses around the world. generates file for you Of free cash flow, their fortunes are increasing with global economic growth. But since it still has cross-border volume issues, and what I see as a very high rating, I am also cautious about its fundamentals.

Let’s start with the revenue to see where Visa has been in order to give some context as to what it might be headed for.

Source: TIKR.com

We can see that the company’s revenue growth has been strong for a long time but turned negative last year. That’s unsurprising given that the pandemic has shut down many parts of the global economy for months, and with it, Visa’s lucrative fees. This is a temporary condition, but we are about a year and a half into the pandemic, and Visa is still battling its effects.

Source: Investor Presentation

The company’s last quarter showed international transaction revenue that is still far 19%, whose other sectors could not fully balance its growth. Adjusted revenue fell 3% in the second quarter, while many other companies reported massive year-over-year revenue hikes as they face the worst of the pandemic; Visa is still trying to get out of the hole it was left in last year.

Below we can see the culprit, which is still the transnational volume.

Source: Investor Presentation

On a nominal basis, cross-border volume declined 6% in the second quarter, a period that was in the early stages of the pandemic. If anything, we hope to see very strong numbers comparable to this period, but Visa remains weak. On a constant dollar basis excluding intra-European transactions, cross-border volumes fell by a staggering 21%.

Below we can see why cross-border volumes continue to be weak.

Source: Investor Presentation

On the left are constant dollar-based cross-border trading volumes indexed at 2019 levels, and Visa is still well below the pre-pandemic volumes two years ago. Excluding intra-European transactions, they operate at around 80% of normal volumes. If we look at the same data divided into categories of Visa reports, we can see that travel is the main reason for lower volumes, while the card is not present and the current card (excluding travel) is experiencing significant bounces.

Sure, the picture isn’t all bad for Visa on the revenue front, but I’m quite surprised it continues to suffer as much as it does after the early stages of the pandemic.

The effect this had on revenue reviews was profound and not in a good way.

Source: Find Alpha

Revenue estimates for all years on this graph are flat or lower than they were Four years ago, which indicates that analysts have essentially identified Visa’s revenue potential, and that Visa has absolutely no ability to exceed these estimates.

If we scale up the post-pandemic period, the estimates are lower in most cases, and in large part, because it takes too long for Visa to recover from the pandemic. This is a long way from being bullish, and you wouldn’t think looking at this chart that this company’s stock would make a new high.

We see the same with EPS, where estimates continue to get difficult.

Source: Find Alpha

The story is the same, so I won’t repeat it, but Visa has a huge amount of work to do just to get back to pre-pandemic levels, not to mention support a new stock surge.

Other considerations

I mentioned at the beginning that Visa’s model offers it great profit margins and free cash flow, and we can see how much it stands out below. I have plotted the two components of a foreign exchange fund – operating cash and capital expenditures – on a twelve-month basis to illustrate this.

Source: TIKR.com

It’s not unusual for Visa to get $10 billion annually from FCF, which is a huge amount of money for any company. This has given Visa the ability to make acquisitions, invest in future growth initiatives, and return tens of billions of dollars in surplus capital to shareholders over the years. And that’s great, but keep in mind that as a percentage of the company’s $509 billion market capitalization, $10 billion actually starts out looking pretty small. This means that shareholders cannot rely on returns on capital to generate meaningful returns in this case.

The 0.5% dividend yield is a bit better than a savings account, so it’s not worth it for income investors. However, Visa has spent huge amounts of money on share buybacks, so let’s see if that provides some strength to investors’ portfolios.

Source: TIKR.com

Visa’s twelve-month overdue repurchase spending is generally in the $7 billion range, so it’s about what the company can afford without borrowing to make the purchases. But still, as we will see below, the number of shares does not move much.

Source: TIKR.com

The serving number is gradually decreasing, which is great. But keep in mind that Visa’s buybacks are basically maxed out today, spending roughly 70% of your FCF on buybacks. And barely moving the needle as it is, I also don’t see this as a meaningful source of revenue, similar to earnings.

This leaves us with a growth in earnings, and as we saw above, this picture is not entirely bullish.

Inventory seems unsustainably expensive

Every way I look at Visa, I see an exorbitant stock with mediocre fundamentals. We’ll start from price to revenue.

Source: TIKR.com

Shares are going for a staggering 20x sales today, an all-time high. The average for the past five years is 15 times forward sales, but it’s long at about 12 times that too. I’m not saying that Visa should trade for 12X forward sales, but I’m saying it looks pretty full priced by this metric.

If we look at the earnings, it’s the same story.

Source: TIKR.com

The valuation is very close to an all-time high of 38 times forward earnings at a time when earnings estimates remain well below pre-pandemic levels, and recovery is taking a long time to pay off. This combination, for me, just doesn’t work. I expect a stock to hit a new high until it at least sees some sort of upward revision in earnings, but Visa doesn’t have that.

Looking at all of this, I see a stock that has what appears to be a very late stage rally, a company with average growth prospects at best, and an overpriced valuation. This combination is not one of the things I’m interested in owning, and I think the odds of selling are much higher at this point in the ever-rising. It’s going to take incrementally higher cost per share for that rally to continue, and I don’t see that.

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