Visa stock (NYSE: V), the largest global electronic payment solutions company, gained a meager 5% – increasing from about $219 at the beginning of 2020 to around $230 currently, underperforming the S&P500, which grew 20% over the same period. However, the company’s payments volume has seen some recovery over the recent quarters – nominal domestic payments volume and nominal cross-border volume increased 18% and 10% y-o-y in Q3, respectively (FY Oct-Sept).
There were two clear reasons for the improvement in payments volume: First, easing of travel bans and Covid-19 restrictions in several countries, second, the U.S. government’s approval of the $1.9 trillion coronavirus relief package in March.
But we believe there is more upside to come over the coming months
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Trefis estimates Visa’s valuation to be around $279 per share – about 24% above the current market price – based on one key opportunity and one risk factor.
The opportunity we see is Visa Revenues growth over the subsequent quarters. Visa generates around 95% of its total revenues from service, data processing, and international transactions revenue streams, which depend on payments volume, the number of processed transactions, and cross-border transaction volume. The company witnessed some drop in cross-border transaction volumes in 2020 due to the Covid-19 related restrictions. Further, it posted a lower growth rate in payments volume and processed transactions in the year. It resulted in a 5% y-o-y drop in net revenues ($21.8 billion). That said, the situation has improved over the last nine months with Visa reporting an 11% and 4% y-o-y growth in its domestic payments volume and cross-border payments volume. In addition, the number of processed transactions has also improved over the same period. It could be attributed to recovery in consumer spending levels, easing of lockdown restrictions – especially travel bans in Q3 and a fast-paced Covid-19 vaccination program.
The company recently released its third-quarter 2021 results, with revenues and earnings beating the consensus estimates. Its net revenues of $6.1 billion were 27% more than the previous year. This could be attributed to a 54% rise in international transaction revenues, followed by a 32% y-o-y growth in domestic processing revenues. Moving forward, we expect the same trend to continue in the last quarter of FY2021. Overall, it will likely enable Visa’s revenues to touch $24.1 billion in FY2021. Our dashboard on Visa’s revenues offers more details on the company’s segments.
Visa’s net income margin is expected to see a slight improvement in 2021, leading to a net income of $12.3 billion. It is likely to result in an EPS of $5.63, which coupled with the P/E multiple of just below 50x will lead to a valuation of around $279.
Finally, how much should the market pay per dollar of Visa’s earnings? Well, to earn close to $5.63 per year from a bank, you’d have to deposit about $563 in a savings account today, so about 100x the desired earnings. At Visa’s current share price of roughly $230, we are talking about a P/E multiple of just below 41x. And we think a figure close to 50x is appropriate.
That said, payment solutions appear as a risky business right now. Growth looks less promising and near-term prospects are less than rosy. What’s behind that?
Visa is heavily dependent on consumer spending levels, which is linked to its payments volume. Any drop in consumer spending levels is expected to have a direct impact on the company’s top-line. While the payments volume has improved over the recent quarters, any sudden uptick in the number of cases or worsening of the economic conditions can hurt the consumer spending levels, hurting Visa’s revenues. To sum things up, we believe that Visa stock is undervalued.
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