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Visa Stock Is Expensive, But It May Climb Higher

Thomas Niel

Visa (NYSE: V) stock is on a tear. Visa stock is up over 37% year-to-date. After the company recently beat average earnings expectations, investors continue to show high confidence in Visa’s future prospects.But after this fantastic run, is Visa stock still a buy?

At its current valuation levels, V stock price is elevated. But given macro factors that will be good for Visa’s business over the long-term, V stock price could climb further.

Is Visa stock still a buy? Should investors avoid V stock while the shares remain richly valued? Read on to learn the verdict on Visa stock.

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Strong Earnings Report Supports V Stock

On July 23, Visa released its earnings for the quarter that ended on June 30. The company continues to post solid growth numbers. For the quarter, its sales came in at $5.8 billion, an 11% year-over-year increase. Adjusted earnings per share climbed 14% YoY. The growth of global card payments continues to fuel increases in its revenues.

For fiscal year 2019, Visa anticipates revenue growth in the low double-digit percentage levels. But what are Visa’s long-term growth strategies? Is it willing to look outside the box to sustain its growth? Based on recent developments, it appears Visa can continue to grow by providing new services.

Cross-Border Payments Could be Key to Long-Term Growth

Visa dominates the card payments industry, with the largest global market share outside of China. But to sustain above-average growth,  Visa needs to look to new frontiers. One area of opportunity is cross-border payments.

With the launch of Visa B2B Connect, the company now offers a seamless alternative to legacy bilateral networks. Traditionally, cross-border transactions required multiple hand-offs before the funds were fully transferred. But this costly, time consuming process is not compatible with today’s global business environment. B2B connect uses blockchain technology to improve transparency and reduce complexity. That streamlines the whole cross-border payment process.

Along with Visa’s legacy competitors, many upstarts are getting into the cross-border payments space. But unlike competitors such as Ripple’s Ripplenet, Visa’s B2B Connect does not use cryptocurrency for transactions. Given the high volatility of cryptocurrency, financials institutions likely prefer the stability of B2B Connect. Visa’s competitor, MasterCard (NYSE: MA), could also enter this space. But so far, MasterCard has focused on specific niches within B2B global payments.

After the rollout of B2B Connect, does Visa have additional opportunities that can become positive catalysts for  Visa stock? Or is all the growth from the initiative already reflected in V stock price? After analyzing the valuation metrics of V stock, I believe that Visa’s valuation is in-line with  its peers.

Valuation: Visa Stock Richly Valued, But In Line With Peers

Confident in the company’s strong franchise and high operating margins, investors continue to bid up the V stock price. Similar to its peers, Visa stock trades at a premium valuation. The company’s shares have a forward price-earnings ratio of 34.1. The company currently trades at an enterprise value to EBITDA ratio (EV/EBITDA) of 28.

Here are the current earnings multiple valuations for Visa stock’s peers:

MasterCard: 36.7 times forward earnings, EV/EBITDA of 31.3

PayPal (NASDAQ: PYPL): 55.4 times forward earnings, EV/EBITDA of 48.6

V stock trades at a slight discount to MasterCard stock. PayPal trades at a premium to both companies. That is understandable, given investors’ high confidence in PayPal’s ability to disrupt the market. Even so, the earnings multiple of V stock seems excessive.

While the company continues to generate above-average revenue growth and high margins, paying a high premium for Visa stock may expose investors to material losses if its outlook deteriorates.

The Bottom Line: Visa Stock Is Overvalued, But the Shares Could Continue to Climb

Despite Visa stock’s rich valuation, investors continue to bid up the V stock price. Global card payments continue to grow, aided by the boom in e-commerce, as well as growth in emerging markets.

Visa and MasterCard have solid franchises that give them significant moats. But with a variety of legacy competitors, along with fintech upstarts, gaining traction in the space, this advantage may be threatened over the long-term.

However, Visa appears equipped to handle the challenges. With its strong brand equity and infrastructure, the company has leveraged its reputation to enter new areas of growth, such as B2B Connect. As a result, Visa could deliver above-average growth over the long-term.

While in the short-term Visa stock’s valuation appears excessive, it may not be smart to bet against V stock. From its past performance, it’s clear that investors believe the company has a wonderful business and trades at a fair price. As the company’s growth continues,Visa stock will likely appreciate, with its valuation staying level. While macro factors may lead to a valuation correction down the road, I do not expect  V stock price to drop significantly.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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