Visa’s stock looks cheap in many ways, but this is definitely a stock that only growth investors will likely find attractive.
“Too late” on Wall Street isn’t as simple as checking the time. Investors are, effectively, making predictions about the future when they buy a stock. For example, is it too late to buy Visa (V 0.76%) now that it is trading near its all-time highs again? It depends on what you think is going to happen from here. These are some factors to consider as you try to answer that question.
Is Visa’s stock cheap?
As just noted, Visa’s shares are trading near their high-water mark. In that regard, the stock is worth more today than it ever has been. So it would be hard to suggest that the price tag for a share of Visa is low. But if the stock keeps going higher, well, then hindsight will show the stock was cheap.
V data by YCharts.
The current price, meanwhile, comes after a quick rally during the past month that saw Visa rise about 8% or so. That rally was then cut roughly in half after the Department of Justice said it was considering an antitrust case against the company. This is kind of the norm for Visa, which has zigzagged higher over time and frequently faces customer and regulatory scrutiny.
So what are the chances of Visa continuing to rally? Over the long term, the business looks to be well positioned. Visa is one of two main transaction processors, effectively sharing a duopoly with Mastercard (MA 0.37%) — a big reason it ends up being the target of customer and regulator ire.
There are other players, but they are pretty distant competitors. As more and more financial transactions take place digitally and via credit or debit card, Visa’s top and bottom lines will expand. There’s a very good reason to believe that the future will, in fact, be bright even in the face of new legal challenges.
What about Visa’s valuation metrics?
Here’s where things get interesting. Although the shares trade near all-time highs, the stock’s valuation seems to be attractive today. Some numbers will help illustrate this argument.
On the top line, Visa’s price-to-sales ratio (P/S) currently sits around 16. The five-year average for this revenue-based metric is 17.7. That hints at a cheap price tag.
On the bottom line, its price-to-earnings ratio (P/E) is roughly 30 versus a five-year average a touch over 34 for this income-based metric. Again, Visa comes out looking cheap.
The same basic trend exists for price-to-cash-flow. The only traditional valuation metric that isn’t hinting at a cheap price tag is price-to-book-value, which is 14.7 today versus a five-year average of 13.5.
It isn’t uncommon for individual valuation metrics to suggest different answers, and it is often best to take them as a whole. So three out of four hinting that Visa is cheap probably means it is cheap.
Adding to that take is the dividend yield. The current yield isn’t the highest it has ever been, but it is very clearly toward the high end of the historical range. Once again, that suggests a stock that is cheap.
V dividend yield; data by YCharts.
Except that the yield is a miserly 0.7% or so. That’s even lower than the S&P 500 Index’s paltry 1.2% dividend yield. Even if Visa is cheap in some ways, it is still dear in others. The near record-high stock price and a below-market dividend yield are not attributes that will likely attract income investors.
The final call on Visa: It depends
Is it too late to buy Visa’s stock? Probably not, given the long-term potential of this industry leader. Add in the fact that key valuation metrics hint at a cheap price tag, and the thesis for buying it today is even stronger.
But not everyone is going to find this growth stock attractive. That’s particularly true for dividend seekers, but even value investors might have a hard time here given the stock’s near all-time high price.
All in, if you are a growth investor, there’s a good reason to like Visa today. If you aren’t, you should probably watch this stock from the sidelines.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.