Price Correction On The Cards For Visa’s Stock?

Visa’s (NYSE: V) stock has rallied more than 40% since the beginning of 2019 thanks to the payment company’s strong performance in each of the last four quarters. While the company’s outlook over coming years remains strong, we believe that investors are being too optimistic and estimate the fair value of Visa’s stock to be $179 per share – roughly 5% lower than the current market price. Trefis details the key components of Visa’s valuation in an interactive dashboard, along with our forecast for full-year 2020.

In Q4 2019, Visa’s net revenues grew roughly 13% y-o-y to $6.14 billion, largely driven by a 16% jump in data processing revenues and an 11% growth in international transaction business. However, the company’s adjusted net income margin contracted by 310 basis points, falling from 52.4% in Q3 2019 to 49.3% in Q4 2019. The company ended its fiscal year 2019 on a strong note with net revenues growing by 11.5% to $23 billion despite macroeconomic uncertainties surrounding the U.S.-China trade deal and Brexit. While the company management expects a low double-digit growth in net revenues for fiscal 2020, we remain wary of headwinds from the ongoing U.S.-China trade war, as well as of the company’s increasing costs.

We arrive at the stock price estimate for Visa as:

Stock Price = (Total Revenue x Net Income Margin / Shares Outstanding) x P/E Multiple

Growth In Data Processing And Service Business Would Drive Visa’s Revenues For Full Year 2020

• Net Revenues have increased from $15.1 billion in 2016 to $23 billion in 2019 (ending September), and could grow 10% to $25.2 billion in 2020
• Visa has added $7.9 billion to its net revenues over the last 3 years, mainly driven by growth in international transactions and data processing revenues.
• Going forward, we expect it to add $2.2 billion to net revenues in 2020, allowing the top line to reach $25.2 billion. This would be mainly driven by 15% y-o-y growth in data processing revenues followed by an 11% increase in service revenues.

We capture the factors that have driven changes in revenues of Visa’s segments over recent years along with our forecast for 2020 in a separate interactive dashboard.

Higher Revenues Would Strengthen The Net Income Figure

• Adjusted Net Income grew from $6 billion in 2016 to $12.1 Billion in 2019, and we expect it to be around $13.1 billion in 2020.
• The adjusted net income margin increased from 39.7% in 2016 to 52.6% in 2019. This was mainly driven by a 52% growth in total net revenues over 2016-2019, as compared to the 11% rise in total operating expenses.
• Moving forward, we expect the net income to grow 9% in 2020 mainly due to higher revenues.
• However, the net income margin would drop by 60 bps due to a slightly higher effective tax rate compared to the previous year.

This Lends Support To A $179 Price Estimate For Visa’s Shares

• Visa has regularly invested in share repurchases to boost shareholder returns and the trend is expected to continue in 2020.
• Lower outstanding shares coupled with higher Net Income figure should result in Visa’s EPS figure increasing to $5.93 in 2020.
• Using a 30x P/E Multiple on expected 2020 EPS of $5.93, this works out to our price estimate of $179 For Visa’s Stock.

Details about how Visa’s P/E multiple compares with peers American Express, Discover Financial and Mastercard is available in our interactive dashboard.

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