Visa Stocks: Buy, Sell or Hold?

Visahis (V 0.22%) the stock has remained almost constant this year because S&P 500 advanced by 14%. Macro headwinds for consumer spending, recession fears and antitrust challenges have caused the payment card provider to lose its luster.

Should investors consider buying and holding Visa stock while the bulls look the other way? Or should they sell or avoid it until the macro and regulatory headwinds dissipate?

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Understanding the Visa business model

Visa is often thought of as a credit card company, but it doesn’t offer any cards. Instead, it only works with banks and other financial institutions to issue Visa-branded credit cards. These institutions bear the entire credit risk and are responsible for collecting any unpaid debt. They also link Visa-branded debit cards to their own checking accounts.

Visa is solely responsible for routing these payments through its massive global payment network. Visa charges the merchant a “passing fee” (typically between 1.5% and 3.5%) for each transaction, splits that fee with the card issuer and keeps the rest as revenue. Visa’s main competitor MasterCard (ME 0.04%) uses the same business model.

How fast is Visa growing?

Visa and Mastercard account for over 90% of the payment processing market outside of China. This near-duopoly makes both attractive long-term plays on the secular decline of cash-based transactions. Their size and brand recognition gives them wide moats and they don’t take any credit risk on the payments they process.

Visa and Mastercard don’t face much competition from mobile payment apps, as most consumers still link these apps to their existing credit cards. Merchants also don’t have much power to negotiate lower swipe fees, as they would likely lose a lot of customers by cutting them off from the world’s two largest card processing networks.

From fiscal 2013 to fiscal 2023 (which ended last September), Visa’s revenue grew at a compound annual growth rate (CAGR) of 11% as its earnings per share (EPS) grew at a CAGR of 16%. Its shares are up more than 390% over the past 10 years, as the S&P 500 has advanced less than 180%. It also bought back over a fifth of its shares in that decade.

But keep in mind the macro and regulatory challenges

Visa looks like an evergreen stock, but it’s not immune to macro and regulatory headwinds. On the macro front, high interest rates and inflation can impact growth by curbing consumer spending and reducing transfer fees.

On the regulatory front, Visa and Mastercard have both faced constant antitrust pressure to reduce their swipe fees since 2005. In March, the two companies reached a preliminary settlement with several merchant groups to reduce average transfer fees by at least four basis points. the next three years. They also agreed to cap their fees at least seven basis points below the current average for the next five years. But in late June, a US judge rejected final approval of the deal. That failure could force Visa and Mastercard to set even lower fees to settle the case.

Is it time to buy, hold or sell Visa?

Despite these challenges, analysts still expect Visa’s revenue and EPS to grow 10% and 17%, respectively, in fiscal 2024. From fiscal 2023 to fiscal 2026, its revenue is expected to grow at a CAGR of 10% and 14% respectively. We should take these estimates with a grain of salt, but they suggest its stock is still reasonably (but not cheaply) valued at 23 times forward earnings. Mastercard, which faces many of the same near-term challenges, looks slightly more expensive at 32 times forward earnings.

I don’t think there is any reason to sell or avoid Visa as a long-term investment at this time. Its core business is still growing; has a deep groove; and has a lot of pricing power. That said, I’m not sure now is the best time to buy the stock, as fears of a recession and an antitrust crackdown are compressing its valuations. So for now, I’d advise you to just hold Visa stock if you already own it. I would buy more of the stock if it pulls back further, but its upside potential may be limited in this difficult market.