Is Visa a Winning Stock This Earnings Season?

As Visa, Inc.’s (V) July 23 earnings release approaches, the stock is seeing explosive growth. It gained almost 36% year-to-date, double the S&P 500’s 18% increase. As the number of non-cash payments is only expected to rise, analysts and financial bloggers are saying V is in it for the long haul. Not to mention Jefferies analyst, Trevor Williams, initiated his coverage of the stock with a Buy rating and set his price target to $210 on July 18, suggesting 17% upside potential.

Is this enough to convince investors to buy Visa ahead of earnings?

Expectations for Q3

According to consensus estimates, the company should see quarterly revenue reach $5.7 billion, a 9% gain from the prior-year quarter. Growth for client incentives is expected to fall within the range of 22% to 23% as a percentage of gross revenues. It’s predicted that Q3 will have the highest exchange rate drag for the year at 200 basis points on net revenue and 300 basis points on EPS. However, by Q4, management believes this figure will drop to 100 basis points for net revenue and 150 for EPS.

For the rest of fiscal year 2019, the company raised its expectations for EPS growth to be the high end of mid-teens on an adjusted non-GAAP nominal dollar basis and the low 20s on GAAP nominal dollar basis.

Visa Looks Strong Long-Term

Consumers are relying more and more on non-cash payments as a more convenient way to pay. Over the last few years, non-cash transaction volume grew by 10% plus clip. Experts predict that this trend will continue.

While cash payments are still common in developing countries, credit card usage is expected to rise as these countries adapt to the digital age. Global non-cash payments volume is expected to increase by at least 10%. A 20% plus growth rate is forecasted for emerging market non-cash payments volume.

Visa has a majority stake in the market, with a $394 billion market cap compared to Mastercard, Inc.’s (MA) $285 billion. It controls 50% of the world’s card payments market excluding China.    

Its volume, transaction and revenue growth rates are expected to persist as the card payments market continues to develop.   

Business Model Expansion  

On June 25, it was announced that V is set to acquire Rambus, Inc.’s (RMBS) token services and ticketing businesses. The technology gained from this acquisition should help Visa facilitate safer and more secure payments across all of its global commerce products.

SVP, global head of payment products and platforms, TS Anil said, “Facilitating safer, more secure digital transactions is core to Visa’s brand promise and central to growing electronic payments for everyone, everywhere. As the way people and businesses pay and get paid continues to evolve, the addition of Rambus’ technology will allow us to deliver greater security beyond the card to support more transactions, payments systems and participants.”

In Q3, Visa continued to expand its business model with the addition of several new product offerings. In June, the company launched new installment capabilities for cardholders. Issuers and merchants can now offer installment payment options through a buyer’s Visa card, simplifying the installment process for both buyers and sellers. In that same month, Visa released its B2B payment network, allowing financial institutions to process high-value corporate cross-border payments much more quickly.

The company also announced it signed up Coinbase, a brokerage for trading Bitcoin, and partnered with the Libra Association, the governing body for Facebook's (FB) new digital currency.

Potential Valuation Problems

Some investors are concerned that even with V’s strong long-term growth potential, its valuation is too high. The stock’s forward P/E ratio is 33.37, significantly higher than the industry’s average 24.66 forward P/E.

Top financial blogger, Luke Lango, writes, “Visa’s EPS growth should run around 10%-15% over the next several years. At that growth rate, Visa’s EPS will settle around $11 by 2025. Based on a historically average 25 forward multiple and 10% discount rate, that equates to a fundamentally supported 2019 price target for Visa stock of roughly $170. Thus, at $180 mid-way through 2019, Visa stock seems slightly overvalued.”

What are the Analysts Saying?

Deutsche Bank analyst, Bryan Keane, reiterated his Buy rating while raising his price target from $177 to $225 on July 11. He believes share prices could jump by as much as 26% over the next twelve months. “Although the payment networks have a long runway to benefit from the secular growth of card-based transactions, the expanding market share opportunity into new account-to-account payment flows and non-interchange based revenue models are being underappreciated,” he said. Keane has an 80% success rate and a 22% average return per rating.

Another five-star analyst from Baird, David Koning, expressed his confidence in V’s ability to sustain its growth rates. On July 19, he maintained his Buy rated and raised his price target from $182 to $196, indicating 9% upside potential. The analyst boasts an impressive 85% success rate as well as a 21% average return per rating.  

The Final Verdict

Despite an expensive valuation, the Street remains bullish on Visa. The stock has a ‘Strong Buy’ analyst consensus, with 14 Buy ratings vs 1 Hold received over the last three months. It has a $192 average price target, suggesting 7% upside potential.