Introduction
Over my lifetime, I have invested in many different things. In the process, I have learned there are really only two types of investors: active or passive. Being active implies directly managing or being in control of your investment. In contrast, as a passive investor you allow others to manage the asset on your behalf. There are advantages and disadvantages to both approaches, and neither approach is necessarily better than the other. It all comes down to each individual’s personal preference.
When I was younger, one of my active investments was running a quarter horse ranch. Unlike humans, a horse’s teeth continue to grow as they age. Consequently, you can judge the age of a horse by looking into its mouth and checking the length of his teeth. The longer the horse’s teeth, the older the horse. This method of checking the horse’s teeth to determine its age is also the source of another old adage: “never look a gift horse in the mouth.”
As a long-term investor in Visa Inc. (V, Financial), I would describe my experience more recently as a gift. Therefore, I do believe it is time to question the value of this gift. More precisely, I believe it is time to question the valuation of Visa.
FAST Graphs valuation analysis of Visa
I have been long Visa since May of 2011, and it has been one of the best-performing stocks I have ever owned. The following analysis video, however, clearly illustrates the undeniable reality Visa’s stock price has become significantly overvalued. I believe the risk associated with such a high valuation is crystal clear when viewed visually via FAST Graphs. Visa continues to be a great company with a clearly defined future, but investors should never forget price is what you pay and value is what you get.
Summary
Although I am currently challenging whether it is prudent to continue holding onto my position in Visa or not, it is important to point out my view of the company remains extremely positive. In other words, I still like the company today as much or even more than I did when I purchased it in May 2011. The company has performed almost precisely as I expected it to. Furthermore, I expect the company to continue growing at above-average rates of 15% to 20% per annum going forward.
There is a lot more to Visa than simple credit cards. The following business description from S&P Capital IQ summarizes Visa’s businesses and its long-term opportunities.
“Visa Inc. operates as a payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities worldwide.
The company’s transaction processing network facilitates authorization, clearing and settlement of payment transactions and enables it to provide its financial institution and merchant clients a range of products, platforms and value-added services.
The company offers VisaNet that authorizes, clears and settles transactions processed by the company, excluding European domestic transactions, which are routed through the European processing platform. VisaNet consists of various synchronized processing centers that are linked by a global telecommunications network and engineered for uninterrupted connectivity."
Products and services
According to S&P Capital IQ, Visa offers debit, credit, prepaid and commercial payments services. It also offers transaction processing services, which involves routing payment information and related data so transactions are settled quickly and efficiently.
Visa also offers digital products to facilitate online transactions, payer-initated transactions and token payments. These services include Visa Checkout, Visa Direct and Visa Token Service.
The company's merchant products help improve customer engagement. These products are Visa Advertising Solutions, Visa Commerce Network (VCN) and CyberSource.
To help customers minimze risk and enable secure transactions, Visa continues to develop and improve its suite of risk products and services, which include Visa Risk Manager, Visa Advanced Authorization, Visa Consumer Authentication Service and Visa Consumer Transaction Controls.
Competition
According to S&P Capital IQ, Visa’s competitors include Mastercard Inc. (MA, Financial), American Express Co. (AXP, Financial), JCB International and Discover (DFS, Financial).
Significant events
In January, Oman Arab Bank and Visa entered a strategic partnership in which the bank's electronic cards were converted to secure chip-and-PIN debit cards. According to the terms of the agreement, the bank's customers would be able to use their cards to ensure all payments are made.
In January 2015, Bottomline Technologies and Visa announced a strategic alliance. Visa Payables, a commercial card solution, and Bottomline’s payment network, Paymode-X, joined to create Paymode-X with Visa Payables. This solution allows for smoother business payment automation.
Conclusion
I believe Visa’s current valuation has become extreme. Therefore, I do believe it is time to start looking this gift horse in the mouth. The company and its stock price continue to perform, however. As a result, I have decided to continue riding this horse a little longer. On the other hand, I am doing so with my eyes wide open. In other words, I am vividly aware Visa’s fundamentals - as good as they are - do not support its lofty valuation over the longer run.
As indicated in the above video, I believe Visa’s current valuation has gotten long in the tooth. Consequently, I find myself faced with one of my most frustrating dilemmas. I do not want to sell this wonderful business, but I also do not want to see my gift of excess profits vanish either. Nevertheless, I am diligently watching my position and am prepared to sell at the hint of any bad news. The only thing I am truly certain about is I would not add money to this position at this valuation.
Disclosure: Long Visa at the time of writing. The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
