I wrote a piece back in July “Visa: The Valuation Conundrum In A Frothy Market” putting forth my belief that Visa Inc. (NYSE:V) did not possess the growth characteristics to justify its valuation and its appreciation was largely a function of its Visa Europe acquisition and the overall bull market. This bull market was rewarding stocks with sky-high valuations particularly in the technology sector which has recently fallen out of favor. The recent market wide sell-off in equities during the fourth quarter has erased all gains for the broader S&P 500 index and many individual stocks. Despite this market wide sell-off, Visa has delivered great returns in 2018, appreciating 23% and currently sits at $137 per share against a 52-week high of $151. Visa faces emerging threats in the digital payments space, blockchain technology and maturing markets in the traditional payments space leading to slower growth prospects. I’ve been reluctant to get behind the stock of Visa considering its valuation, slowing growth and trends away from the traditional credit card space among the younger demographics that embrace PayPal (PYPL) and PayPal’s Venmo for payment options and exchanging payments between multiple parties. There’s also Zelle that is now powering transfers to and from bank accounts, adding to the digital evolution in the payments space. Amazon (AMZN) may be disrupting the credit card transaction space with its potential launch of Amazon financial services and Amazon Pay. I feel that shareholders have become overly enthusiastic about Visa’s growth prospects. The stock has appreciated over 20% this year, boasts a P/E of over 30 and a PEG of over 1.7 in the midst of a frothy market that has only recently sold off. This scenario doesn’t provide a great benefit-reward profile at these levels in my opinion unless the market wide pull back brings Visa more in-line with its growth profile.
Visa Fiscal Q4 Earnings and Valuation Paradox
Visa reported its fiscal Q4 earnings that beat on EPS by $0.01 (EPS of $1.21) and missed on revenue estimates by $10 million (revenue of $5.43 billion) which grew by 11.7% year-over-year. Visa also provided guidance for its fiscal 2019, “annual net revenue growth: Low double-digits on a nominal basis, with approximately one percentage point of negative foreign currency impact.”
I feel Visa’s stock price is still misaligned with its overall revenue growth prospects with an unjustified P/E and PEG ratio that remains higher than the majority of large-cap growth stocks that have a greater growth profile. Visa’s management has forecasted continued revenue growth in the low double digits with EPS growth in the mid-teens, artificially high due to share buybacks. This forward-looking revenue growth rate is a shape divergence from the post-Europe Visa acquisition revenue growth numbers. Visa’s growth rate is slowing from these artificially high post Visa numbers thus misaligned with its growth profile. Continue reading "Visa: The Valuation Conundrum In A Frothy Market - Part Two"