We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where Visa Inc. (NYSE:V) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A close-up of a modern payments terminal with a pile of credit cards on the side.
Visa Inc. (NYSE:V)
Analysts’ Upside Potential: 16.81%
Operating in a duopoly, Visa Inc. (NYSE:V), the world’s largest payments processor, maintains a cost advantage over its competitors due to the strength of its payment network, which makes it extremely hard to replicate. In fact, Visa has partnerships with over 15,000 financial institutions worldwide and has issued over 3.8 billion Visa cards that are accepted at over 100 million retail locations. Consequently, the company enjoys tremendous profitability.
Visa facilitates card transactions by serving as an intermediary between consumers, retailers, and banks. It receives a small cut of the “swipe fee,” approximately 25 basis points, with the majority of the cost going toward funding merchant rewards programs for customers.
It’s vital to note that Visa does not own or service any of the debt incurred by using its credit cards. As a result, it is not responsible for the $1.14 trillion in consumer credit card debt owed in the United States. This means that its profits and business strategy are generally risk-free, as it does not rely on interest and principal payments for revenue.
Despite economic worries, Visa’s Q2 2024 performance exceeded Wall Street projections due to solid consumer spending on restaurants and travel. Post-earnings, the company’s shares jumped by 2.7%. Except for transactions within Europe, Visa’s payment volume climbed by 8% YoY. This points to a robust demand for international travel, particularly from the United States and Europe. Travel in the Asia-Pacific region did not, however, rebound as quickly as anticipated. The expansion of e-commerce aided in counteracting regional weakness.
Visa’s net revenue of $8.8 billion surpassed predictions of $8.62 billion, and its adjusted earnings per share of $2.51 outpaced estimates of $2.44. Analysts view Visa’s reaffirmation of its 2024 revenue and profit estimates as a good indication despite industry concerns.
Dan Dolev, senior analyst at Mizuho stated:
“There were a lot of investors who thought that they would have to cut the guidance, and the fact that they did not, is a positive for Visa,”
Aristotle Atlantic Focus Growth Strategy stated the following regarding Visa Inc. (NYSE:V) in its Q2 2024 investor letter:
“Visa Inc. (NYSE:V) detracted from portfolio performance in the second quarter despite a solid earnings report early in the quarter that highlighted continued growth in payment volumes and value-added services. However, shares declined late in the quarter due to a court denying a proposed settlement that would have ended interchange fee-related litigation between Visa, Mastercard and merchant plaintiffs. As a result, uncertainty surrounding the possible outcomes of the litigation has created an overhang for Visa’s shares, even though interchange fees are charged by card-issuing financial institutions, not networks like Visa and Mastercard.”
Analysts believe that the company’s recent $30 billion settlement with Mastercard to limit card charges won’t have a significant effect on its financial performance.
There are 25 analysts who have collectively rated the stock as a “buy.” The average price objective indicates a possible gain of 16.81% from the current stock price of $261.14.
Overall V ranks 1st on our list of the best financial services stocks to buy. While we acknowledge the potential of V as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than V but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.