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Robert Stephens, CFA
Robert Stephens, CFA
Articles (169) 

Why Visa Is a Buy

The company’s growth plan could catalyze its financial prospects

May 01, 2019 | About:

Having risen 30% in the last year, further stock price growth could be ahead for Visa Inc. (NYSE:V) as it implements its current strategy.

The electronic payments business has significant growth opportunities in Europe and India, where it is investing heavily in innovative new products. Its strategy also includes making acquisitions and striking new partnerships to offset a recent slowdown in cross-border payment volumes.

Having outperformed the S&P 500 by 20% in the last year, the stock could continue to beat the wider index.

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International growth

Further investments in Europe are set to provide an improved competitive position for the company. Its European business is currently concentrated in the U.K. and Ireland, which together account for 17% of personal consumption in the region. The two countries, however, make up a far larger share of the company’s payment volumes. As a result, the company is planning to diversify its operations among the 12 other markets in Europe that have over $200 billion in consumption expenditures.

In order to achieve this goal, it is increasing the number of customer-facing employees in European markets by 70%. It is also adding new features to its offering, such as customer alerts and spending controls, while developing new authentication solutions that may provide it with greater product differentiation versus competitors.

Growth in India may also catalyze Visa’s financial performance. The company recently struck a partnership with Paytm to provide debit credential solutions. Since Paytm plans to significantly grow India’s point-of-sale acceptance infrastructure over the next several years, the partnership could boost Visa’s growth rate.

Partnerships and innovation

The company’s investments in innovative products and services have focused on the financial technology sector. In the most recent quarter, Visa signed deals with four fintech companies, including Coinbase, in the U.K. This enables cardholders to spend their cryptocurrency at a Visa-accepting merchant. With consumer participation in the wider cryptocurrency ecosystem having grown 94% in 2018, moving further into this space could lead to income growth.

Recent partnerships include an agreement with Branch, which is the most downloaded financial app in Africa. It has 3 million users and offers micro loans to consumers. Following the agreement, the funds being lent are now pushed to a Visa credential that exists within the borrower’s phone.

Visa has also entered into partnerships with HSBC (NYSE:HSBC) to cover a combination of consumer and commercial payment portfolios in 27 countries, as well as PayPal (NASDAQ:PYPL) to expand its cash withdrawal capabilities from the PayPal wallet in Canada. These partnerships will expand the company’s exposure to potentially fast-growing segments, and may improve its competitive advantage.

Risks

In the first half of the year, Visa’s cross-border payment volume growth disappointed investors. This is where a purchase is made in a different country to where the card was issued. In the most recent quarter, cross-border payment volumes increased 4%, down three percentage points from the first quarter’s 7% growth rate. Since international transactions account for around a third of the company’s total revenue, a further slowdown in growth could negatively impact its overall performance.

In response to the slowing growth, the company is in the process of purchasing cross-border payment specialist Earthport, which transfers over $6 billion in annualized volumes across fast-growing regions such as Africa and Asia. Visa also struck a deal with EMQ, a cross-border network that sends digital remittance payments across the Asia-Pacific region. These agreements could strengthen the company’s position in the cross-border payments market, helping to alleviate investor concerns about its slower-than-anticipated growth.

Outlook

Visa is guiding for an 11% increase in earnings per share this year, followed by 16% growth next year. This makes the price-earnings ratio of 34 more appealing.

The strategy it is pursuing may lead to a higher rate of earnings growth over the long run. For example, its international growth opportunities in Europe and India, as well as increasing innovation and further partnership agreements, could catalyze its financial prospects.

Having outperformed the S&P 500 over the last year, Visa is an appealing investment opportunity.

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