Visa – Be Care of What’s Ahead

Jun 4, 2022

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Visa is primarily a payment processor that operates payment networks across the world. The company is most well-known for its Visa credit and debit cards. Apart from running one of the largest payment networks globally, Visa is also behind VisaNet, a network that authorizes, clears, and settles payments between consumers, merchants, governments, and institutions worldwide. The company has always enjoyed high valuations, which leads to many problems for investors during turbulent times.

A Problem in the Masterplan

Visa is not a well-diversified company. While the image above shows four different revenue streams, they are all very similar to each other. The company has been trying to expand to other areas such as crypto, but the results have been mixed so far. Source: Visa Quarterly Report

While Visa has had trouble finding new areas to grow into, crypto represented a way out. The company was highly bullish on crypto, with the company’s CEO .

January 2022 showed why this plan is not guaranteed to work. From November 2021 to January 2022, a total of in the market capitalization of all cryptocurrencies. This showed the world just how unstable cryptocurrency really was and that there was a decent chance that .

We are not saying that crypto will surely end or that Visa will not be able to capitalize off its push into cryptocurrency. It is entirely possible that crypto adoption continues to increase, and the coin begins to rival the US Dollar in the future seriously. However, the recent crash proves that the future in question is a long way away.

On top of that, Visa has limited growth opportunities due to its size. It has always been the victim of antitrust legislation, and it is very as a result.

When Cash is King, Visa is Subpar

The general outlook on stocks is much more subdued in 2022 than it was in 2021. Previously, it was expected that the FED would hike the rate between two to four times in 2022. Now, .

The general consensus of the market is that there would be a slowdown in 2022, followed by a . This presents a twofold problem for Visa from an investor’s perspective. For one, stocks generally do not tend to do well in recessions as investors move to safer assets.

Secondly, Visa is a company that primarily relies on credit, as credit cards represent a significant portion of the company’s business. Taking a look at the spending habits of people during the pandemic, it is safe to assume that people will once again if the state of the economy goes south. The fact that interest rates will go up will only compound this trend.

The consensus estimates show Visa generating revenues of $32.7 billion in FY23, up from $24.1 billion in FY21. The net profit is also expected to skyrocket from $12.3 billion in FY21 to $17.7 billion in FY23. This would mean that the company is trading at a P/E ratio of 26.4 for FY23. The only problem is that we don’t agree with these estimates.

Why the Estimates Might be Incorrect

Visa grew immensely in FY21, and the growth should continue. However, we fear the analyst estimates may be rating the company a bit too highly. Source: Visa Annual Report

Keeping all the factors listed above in mind, we believe that there is a decent chance these estimates may be a bit too forgiving on Visa. To be fair, most of the analysts that forecasted Visa’s future performance did so before it became apparent that the FED would increase rates and stocks would have a tough time going forward. Still, while we believe that Visa will experience decent growth over the next few years, we also think that it will fall short of expectations.

Considering the fact that Visa is a company that has almost always enjoyed high valuations, it is difficult to recommend it from a value perspective. However, those who already own the stock may want to hold off on selling. Visa’s all-time high price is above $250 a share, and the chances are that it should be able to cross that threshold again because it is a company that should grow both its revenues and profits in the years to come.

Lastly, Visa is a decent company when it comes to dividend growth. The total dividend in FY21 was $1.34 per share, and it is expected to balloon to $1.58 by FY23. However, the current yield is just 0.62%, which means much better options are available in the market.

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