Don’t count out this global payments giant.
Shares of Visa (V 2.25%) fell sharply following the release of its latest quarterly earnings. The market appears concerned that the global payments leader is slowing compared to stronger trends in recent years. The stock is now down about 13% from its 52-week high, reversing all gains in 2024.
While this type of volatility warrants some caution, there are plenty of reasons for Visa investors to cheer up. The company is highly profitable with strong fundamentals supporting a positive long-term outlook. Is it already time to buy the dip in shares of Visa? Here’s what you need to know.
Fundamentals remain strong
Visa reported fiscal third-quarter earnings per share (EPS) of $2.42 for the period ended March 31, matching the average Wall Street estimate, and also up 10% from the prior-year quarter. Net revenue of $8.9 billion climbed a solid 10% year over year but did fall slightly short of the consensus by $20 million.
These headline figures don’t necessarily stand out to explain the poor stock market reaction, but it is clear that the growth from key business drivers has decelerated.
Total payments volume growth of 7% this quarter, measuring the global dollar amount of purchases made using Visa-branded cards and digital methods globally, was down from 9% in Q3 2023. This was also the weakest quarter for payment volume growth since the fourth quarter of 2020. Similarly, Q3 total cross-border volume growth of 14% representing international payments also narrowed from 17% in the period last year.
On the other hand, maybe the most encouraging development has been Visa’s momentum from its “other revenue” category, which surged by 31% year over year, and now contributes 9% to total net revenue. While still a relatively small part of the business, the trend is important within Visa’s strategy to diversify beyond transaction-based fees to cover more value-added services like client advisory, marketing, and brand licensing.
CEO Ryan McInerney commented on this theme during the earnings conference call:
We’re very excited about what we delivered in terms of value-added services growth for the quarter. What we’ve been delivering consistently for several years now since we shared with you all the strategy and kind of became very purposeful about our go-to-market approach. … And we’re super optimistic about where we go from here.
That dynamic is a tailwind for the company’s ability to generate significant free cash flow, which reached $4.7 billion in Q3. For the full year, Visa expects net revenue growth in the “low double-digit” range and is targeting EPS growth in the “low teens” over 2023.
Image source: Getty Images.
Shares of Visa are on sale
The attraction of Visa as an investment opportunity starts with its high-quality earnings profile. The company is recognized as a dividend grower, likely to extend its 16-year streak of consecutive annual dividend increases later this year alongside an existing $19 billion stock buyback authorization.
Favorably, the sell-off has worked to narrow Visa’s valuation premium. The stock is trading at around 26 times its full-year consensus EPS forecast of $10.05, as a forward price-to-earnings (P/E) ratio. This level is below the stock’s five-year median average for the ratio closer to 33 times earnings.
Visa’s ability to keep driving earnings higher and expand into new types of services can support a wider valuation multiple as part of the bullish case for the stock. Through a resilient global economy, the possibility that the Federal Reserve begins cutting interest rate cuts could support stronger top-line growth for Visa as businesses and consumers benefit from easing credit conditions.
V PE Ratio (Forward) data by YCharts
Room to stay bullish
Even with the shares under pressure this year, the big picture hasn’t changed. I’m cautiously bullish on Visa and expect shares to continue delivering positive returns over the long run. At the same time, it is more difficult to say how long the latest round of volatility will last or where the near-term bottom for the stock will be. By this measure, a hold rating on the shares is prudent or investors can consider adding to an existing position through dollar-cost averaging within a diversified portfolio.
Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Visa. The Motley Fool has a disclosure policy.