Visa Stock Analysis: Buy or Sell?

SUMMARY

Parkev Tatevosian, CFA, reviews Visa's latest quarterly results, highlighting robust revenue growth, resilient spending trends, and significant share buybacks. He concludes that despite increased costs and macroeconomic headwinds, Visa remains a compelling buying opportunity based on valuation and business fundamentals.

MAIN POINTS

• Visa reports 14% revenue growth to $11.6 billion, but earnings per share rise only 10% due to increased costs and litigation. [0:00]
• Despite global economic headwinds and geopolitical conflicts, Visa observes resilient consumer and business spending and invests to defend against fintech innovation. [1:00]
• Visa's revenue model benefits from inflation, and recent results include significant severance and litigation costs. [2:02]
• Operating expenses rise 19% year-over-year, driven by higher personnel costs, prompting a layoff of 2,700 employees. [3:00]
• Visa repurchases $5 billion of its own stock at an average price of $330 per share, with $28.4 billion remaining in its buyback program. [4:00]
• Visa's forward price-to-earnings ratio rises to 24.6, but discounted cash flow analysis suggests the stock remains undervalued at current prices. [5:00]

DETAILED ANALYSIS

Visa's latest quarterly financial results reveal a 14% increase in revenue to $11.6 billion, reflecting strong performance in the payments sector. However, earnings per share grew by only 10%, a lower rate than typically expected given the company's operating leverage, due to rising costs including significant litigation expenses and a major severance charge. The company announced a cost-cutting initiative involving the layoff of several thousand employees, a move likely aimed at controlling ballooning personnel expenses, which rose 19% year-over-year to $4.8 billion.

Despite these challenges, Visa reports that both consumer and business spending remain robust, even amid global economic uncertainty caused by conflicts such as the Russia-Ukraine war and rising trade barriers.

Visa's business model, which generates revenue from a small fee on every transaction plus a percentage of transaction volume, provides a natural hedge against inflation. As nominal spending increases, so does Visa's revenue, offering investors some protection in inflationary environments. The company also faces ongoing regulatory scrutiny and litigation, with recent results including $563 million in severance costs and $237 million related to a major interchange litigation case.

These recurring expenses are factored into long-term evaluations of the company.

A notable highlight is Visa's aggressive share repurchase activity. In the three months ending June 30th, Visa bought back 14.5 million shares at an average price of $330, spending approximately $5 billion. The company has $28.4 billion remaining in its buyback authorization, and recent buybacks have even exceeded cash flow from operations, signaling management's confidence in the stock's undervaluation.

The forward price-to-earnings ratio has increased from 21 to 24.6, aligning with historical averages, yet discounted cash flow analysis places intrinsic value at $413 per share, well above the current market price of $366. This suggests Visa remains attractively valued despite recent share price appreciation, supporting the view that it is a strong buying opportunity.

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