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- By Steve Gray Booyens
Visa's (NYSE:V) stock underperformed the S&P 500 during the past year after beating the index for the last five years. The company had an ongoing merger with Plaid and pandemic affecting its stock price for the past 18 months, but investors look set to experience gains moving forward.
Visa beat its earnings expectations in April with an EPS beat of $0.11 and a Revenue beat of $175.03 million. The company produced a year-over-year CAGR of 12.8%, but that figure dropped by 5% during 2020 and retraced to a 4% decrease in Q1 2021 (compared to 2019). The pandemic has had a large effect on Visa as many brick-and-mortar-based companies weren't operational.
It's expected that Visa will scale back to pre-Covid levels and beyond as the pandemic's effects calm. The increase in money supply will drive more business towards Visa. In addition, the company has a great track record with improving its indirect earnings via streamlined acquisitions.
In January 2020, Visa announced that they were offering a $5.4 billion cash deal for fintech start-up Plaid. The company, only valued at $2.65 billion at the time, was a hot commodity for acquirers due to the API value-add the company would bring. Visa tabled nearly twice the valuation as it wanted to fend off any potential bidders.
The deal grabbed the attention of the U.S. Department of Justice (DoJ), which filed an anti-trust complaint. In January 2021, the DoJ blocked the deal as they decided it would create a monopoly and subsequently affect the industry's health.
We feel as though the merger falling through is a blessing in disguise for the stock. There would've been synergies and a large increase in market share, but the dilutive balance sheet affect it would've had would've caused downward pressure on the stock.
Visa follows a vertical acquisition strategy, which involves purchasing companies in different parts of its own value chain. This contributes to Visa's market share, cost-saving and operating efficiency. The company acquired Rambus (RMBS) and YellowPepper in 2019 and 2020, respectively. The two companies are important to Visa's value-add processes such as ID and verification, security, anti-fraud and tokenization.
Although Visa didn't disclose the details of either deal, we think that no more than $250 million could've been spent on the two companies combined. Visa has historically acquired in a nimble manner where they've bought pre-IPO start-ups instead of acquiring assets from large companies at break-up value. Their acquisition strategy also allows them to take advantage of innovation, which we think this will amplify Visa's earnings and improve operational efficiency, both of which will be reflected in the stock price.
Efficient user of investors' capital
The company uses investors' money efficiently. Apart from a blip in 2020 due to the pandemic, Visa has seen a divergence between return on invested capital and its weighted average cost of capital. If Visa can continue decreasing its WACC whilst increasing its ROIC, shareholders will have more residual to share, and thus have a higher share price.
By working with analysts' expected EPS for 2022 and the GAAP price-earnings ratio, we establish a 12-month price target worth an upside of 30%:
46.99 x 6.33 = $297.44
The forward price-earnings ratio provided us with a quantitative target, which we think will be reached within the next 12-months as the stock's been held back by both systemic and idiosyncratic reasons the past year.
Visa is a safe bet considering a Beta of 1 and a lucrative projected price target worth roughly 30% upside. The stock is a peach right now in my opinion, and investors won't go wrong by investing long-term, especially for the next 12-months.
Disclosure: I don't own any positions in Visa
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This article first appeared on GuruFocus.