Risks
Visa, despite its strengths, is not invulnerable to competition. eBay Inc (NASDAQ:EBAY)‘s PayPal poses the greatest threat, as its electronic payments network has been experiencing strong growth, particularly in the mobile space. Even titans such as Google Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), and Apple Inc. (NASDAQ:AAPL) have either entered or are rumored to be entering the payments space. While these threats are not to be taken lightly, it also should not be forgotten that Visa serves as a partner for many of these services, helping to process transactions or serve as a funding source. So while these rivals may challenge Visa’s growth in some respects, their success could also benefit Visa.
Visa Inc (NYSE:V) is also not immune to global economic slowdowns. A pullback in consumer spending would hurt the company’s transaction revenue. But markets operate in cycles, and a downturn of this nature would ordinarily be followed by an economic recovery. So I will likely view these types of pullbacks as opportunities to add to Tier 1’s position in Visa, rather than a reason to sell.
Finally, and possibly most importantly, onerous regulation is an ever-present risk facing Visa. U.S. legislators have made it clear that they’re willing to step in and actually cap Visa’s and other credit card companies’ debit fees when they feel it’s in the best interest of merchants and consumers — as demonstrated by The Dodd-Frank Act — and it’s possible that regulators in other countries will take similar action in the future. In addition to the threat of increased regulation is the threat of litigation, as Visa is facing multiple lawsuits with the potential for billion-dollar settlements. Unfavorable rulings could have serious negative effects on Visa’s stock price, but the fear associated with these non-certain outcomes is also a likely reason we can buy Visa’s shares at such an attractive price today.
Valuation
Within Tier 1, I’m willing to pay a bit of a premium for a quality business — and Visa certainly fits the bill. But with the company trading at 21 times analysts’ earnings estimates for 2014, and with Wall Street expecting nearly 19% annualized growth over the next five years, I don’t think we’re paying that much of a premium for Visa Inc (NYSE:V). In fact, I estimate shares could return more than 11% per year over the next half-decade if Visa can reach those growth targets, and I believe it will. Those would be solid returns for a Tier 1 business that I consider to be moderate-to-low risk.
The article Visa Is Tier 1 originally appeared on Fool.com and is written by Joe Tenebruso.
Joe Tenebruso manages a Real-Money Portfolio for The Motley Fool and is an analyst on the Fool’s Stock Advisor and Supernova premium service teams. You can connect with him on Twitter @Tier1Investor. Joe has no position in any stocks mentioned.The Motley Fool recommends Amazon.com, Apple, Berkshire Hathaway, eBay, Google, and Visa. The Motley Fool owns shares of Amazon.com, Apple, Berkshire Hathaway, eBay, Google, and JPMorgan Chase.
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