Pros and Cons to Buying Visa Inc (V) Stock

Brian O'Connell


Credit card giant Visa Inc (NYSE: V) has a massive customer base of 3.3 billion card users, and operates in 200 countries and territories with a total spending volume of $11 trillion.

Looking at V stock from a different standpoint, the outcome is just as impressive.

Data show that of every $100 spent by card consumers, $14.60 is spent using a Visa-branded product.

Those facts, however, are already in the rearview mirror. The Visa stock price took a heavy hit in December 2018, and there's no shortage of critics who are wondering if the plastic-wielding powerhouse is capable of standing tall as a new wave of fintech-based digital payment providers sharpens their teeth on Visa's ankles and look to aim higher in 2019.

[See: 7 Top Investing Strategies for an Uncertain Market.]

"I'm quite confident in the business over a long period," Alfred Kelly, the company's CEO said in an October conference call. "We've got lots of different vectors on which I think we can continue to grow this business, whether it's by penetrating new payment flows, penetrating new segments, penetrating new geographies, bringing more of the unbanked around the world into the mainstream financial system."

Is Visa up for the challenge? That's a fair question, and market experts are mixed on whether or not Visa can continue to dominate as the third decade of the 21st century beckons, with ample industry turbulence on the horizon.

V Stock at a Glance

Visa is trading near $140, with an estimated one-year share price outlook of $163 per share.

December was a decided downer of a month for V shareholders, as the stock price fell by almost 8 percent for the month, a slightly bigger decline relative to the S&P 500 index, which fell by 7.5 percent over the same time period.

Still, Visa traded up approximately 15 for 2018 (it was up by 30 percent at one point) as business was -- and is - robust for the payment colossus.

Overall, 2018 revenue growth clocked in at 12 percent while adjusted earnings per share growth stood at 32 percent.

To buy or not to buy Visa stock going forward depends on myriad factors, including the global economy, the ability of the credit card company to modernize its business, and the question of how high if at all, Visa will raise its dividend payouts.

The stock's dividend payout is weak at 0.7 percent, as is the case with many financial payment providers, but Kelly pacified shareholders with an outlook of "low double-digit growth" during 2019 in his October comments, along with high ROI partnerships with PayPal Holdings ( PYPL) and European online payments company Klarna.

Additionally, Visa is linking up with Ingo Money, in a move to turbo boost the company's check cashing and automated clearing house operations.


Pros to Buying V Stock

Shareholders seem to love the stock, even if it did dive at the end of 2018.

"I invested in Visa in 2008 and have reaped a 10-times return on investment over the past decade, being by far the best stock pick I've ever made," says Ben Woolsey, editor-in-chief at CreditSoup.com.

Woolsey says that Visa is "trending upward" with "long-term upside potential for the stock."

"Visa has the best card network and a superior market share in terms of member banks, merchant network, charge volume, cards in circulation and brand strength through national advertising and sponsorships -- particularly their exclusive deal with the Olympics," he says.

Visa is also the strongest financial payments company in terms of digital innovation and is leading the way in evolving toward a digital payment society.

"Look, for example, at the RFID (radio-frequency identification) chips in cards for contactless payments, along with Visa's digital wallet integration with ApplePay ( AAPL), GooglePay ( GOOG, GOOGL) and Visa Checkout," Woolsey says.

[See: 9 Major Upcoming IPOs to Watch in 2019.]

Other market gurus say that Visa is winning the war on three major fronts, and giving investors three good reasons to buy in the process.

"The company is a cash generating machine, with no credit risk, and continues to gain market share," says Bob Bacarella, portfolio manager at the Monetta Core Growth Fund and the Monetta Fund, both of which hold V stock.

Bacarella also notes that during 2018, Visa instituted a $7 billion stock buyback program with estimated free cash flow approaching $12 billion. "The company is growing digital business with a combination of partnerships and acquisitions, and Visa has huge market opportunities in Africa, Asia and India," he says.

Taking another forward outlook, the picture remains bullish on Visa, others say.

"Visa expects net revenues to grow, driven by payment volume growth, tailwinds from incentives and offset by lower yield as average ticket price will compress," says Moshe Katri, managing director of equity research at Wedbush Securities. "Various expense-related "belt-tightening" actions, especially in marketing and recruiting, will also provide incremental earnings cushion."



Cons to Buying V Stock

There are potential headwinds for Visa in 2019, particularly if the economy slows.

"Card usage is somewhat correlated with consumer sentiment about the economy," Woolsey says. "Recent wild gyrations in the stock market could spell short-term issues, but recent retail spending reports look very positive and the other macroeconomic indicators, like near full employment and strong corporate earnings, look positive."

Though not an immediate issue for their stock outlook, large data breaches also point to the need for card networks like Visa to move to require PIN usage for credit card transactions, Woolsey says.

"That's the case (for) the rest of the world, but so far Visa has only taken a half step with the issuance of chip cards, which only eliminates card cloning by thieves," he says.

Others point to the low forward dividend yield, along with concerns over excessive risk.

[See: How a Bear Market's Awakening Affects Dividends.]

"Given the recent market turmoil, investors can find more attractively priced equities in the financial sector with much larger margins of safety than Visa," says Robert R. Johnson, professor of Finance at the Heider College of Business at Creighton University in Nebraska.

The Bottom Line on V Stock

According to Woolsey, a stock looks best when a company has an effective moat in terms of competition. On that front, Visa certainly fits the bill.

"The card network business has one of the highest barriers to entry of any industry group and global commerce has no real alternative to credit/debit card usage," he says. "Visa has always enjoyed a sizeable lead over the other three networks in all aspects of their business, and I don't see that ever changing, so I remain bullish on their stock."