Visa Is Starting to Look Cheap
One company that has recently started showing up on my value radar is American payment processing giant Visa Inc. (NYSE:V). Shares in this company have given back all of their 2021 gains in the past few months. In fact, the stock is now trading around the same level it was at the beginning of 2020.
This brings me to the main reason I think investors have been selling the shares. There has been a general rotation away from "pandemic winners" over the past few months. High-flying technology stocks that investors bought because of pandemic-related business boosts, which were the market's most sought-after investments earlier this year, have rapidly fallen out of favor as the world has started to reopen.
Facing pressures
The above appears to be one of the reasons why Visa's stock has been under pressure recently. The volume of cashless transactions spiked during the pandemic, but it is expected to fall as the global economy reopens and more people buy in-store with cash.
However, in what can only be described as a double whammy for Visa, the group also revealed alongside its third-quarter results that cross-border transaction fees were not recovering as fast as expected. So not only is the company likely to lose out as the economy reopens, but it also looks as if it will not benefit as much as other firms may from cross-border trading picking back up.
There are some other headwinds to consider as well. The recent spat with Amazon (NASDAQ:AMZN) over payment cards shows that retailers are looking for ways to get around the monopoly Visa and Mastercard (NYSE:MA) have carved out for themselves over the past few decades.
Competitors are no doubt looking at these companies' 60% to 70% profit margins and thinking they want to take a bite out of this market. I do not blame them. These margins and the organizations' return on invested capital (around 24% for Visa) are their most desirable qualities.
Company opportunities
The challenges the company faces are clear, but what about the opportunities? Is the selloff of Visa's stock merited, or can it recover to a course of growth?
It is clear that cross-border spending will not return to 2019 levels in the next six months, but even the most pessimistic projections suggest global travel will return to 2019 levels by 2023 or 2024. This could act as a significant catalyst for the company as the amount of money it earns on each cross-border transaction is three times higher than domestic transactions.
Furthermore, while some of the uplift in cashless transaction volumes may fall back as the economy opens, the overall trend is clear. Consumers are spending more and more on cards every single year, and this trend will only quicken as the economic recovery continues and inflation runs higher.
On the topic of competition, it is a little harder to see how this will impact Visa. Competitors have always been looking to take market share from the group. However, even though competitors have come into the market over the past couple of decades, none have been able to carve out the same kind of international recognition as Visa and Mastercard.
Past performance should never be used as a guide to future potential. Still, as the global cashless market continues to grow, I think there will be plenty of room in the market for other providers without disrupting Visa's growth.
Looking at valuation, the company appears cheap. Using a 4% discount rate and a terminal free cash flow growth rate of 10% per year (that is well below the 10-year average of around 18%), the GuruFocus discounted cash flow (DCF) calculator offers a fair value of $246 per share, and that is a discount of 20% of the current stock price. I think these figures incorporate a reasonable margin of safety to encompass the risks outlined above and suggest the stock could look cheap compared to its potential.
This article first appeared on GuruFocus.
