Visa (NYSE:V) stock has quickly remade the ground it lost due to the novel-coronavirus pandemic. Shares of the multinational financial-services firm are now up almost 9% in 2020, despite the shares falling to as low as $133.93 per share in March. Bulls who bought Visa stock at that point are now laughing their way to the bank.
Considering the stock is still trading at a discount to its 52-week high of $217.35, many are wondering if the shares can climb further.
Visa Is Still Facing Adversity
So the fact that the shares are now trading north of $200 per share will confuse many investors. But the owners of Visa stock have good reasons to be optimistic. The company’s recent earnings report clearly shows that its transaction levels are improving, with card-not-present transactions leading the way.
But valuation remains a big issue for Visa stock. The shares are currently trading at a forward price-earnings ratio of 35.5 times. That’s certainly not cheap, considering the short-term challenges the company is facing. Consequently, even though the company is an excellent investment, I would wait for the shares to cool off a bit before adding more of them to my portfolio.
V Stock Is Back in Business
Visa’s recovery was not unexpected. Despite the company reporting respective revenues and EPS declines of 17% and 23%, respectively, recently, its recovery started in June after Visa’s transaction volume bottomed out in April.
Although Visa’s card-present volumes have dropped year-over- year, online transactions are more than making up for the decline. Most e-commerce companies are recording record sales due to Covid-19. Considering this crisis will not end for awhile, online transactions will increase exponentially. And although Visa’s cross-border transactions fell 25% YOY, the numbers aren’t that bad, considering the travel industry’s issues.
Meanwhile, Visa has a rock-solid balance sheet that should help it withstand this crisis. And its cash from operations came in at $3 billion, versus $3.3 billion in the same period a year earlier.
That’s not a huge dip, and that’s why the company went ahead and spent $4.2 billion on repurchasing Visa stock. Normally companies spend money on share repurchases when they have excess cash and are doing fairly well. I don’t think Visa is doing anything reckless by spending money on share buybacks; they can even be taken as an indication that the company’s performance has been resilient.
Valuation Remains an Issue
Although Visa’s fundamentals are great, there is a feeling among investors that the stock has already priced in a recovery. Considering its forward P/E ratio is over 35 times, when it has traded at 30 times earnings for the last decade, many investors are justifiably less upbeat on the shares.
For that number to be justified, Visa will have to grow its profits rapidly. However, given the company’s short-term challenges, rapid profit growth will not materialize anytime soon. Consumer spending will take time to recover, and with stimulus money running out, it will be tough for Visa to generate record transaction volumes for the foreseeable future.
Analysts, on average, expect Visa’s EPS to rise by 13.6% annually over the next five years. While that is respectable growth, it doesn’t justify the company’s current P/E ratio when there are many deep-value stocks to buy instead.
Play the Waiting Game
Visa has been an excellent investment for several years now. As I said in my last article on the company, it is well-positioned for the future. And although Covid-19 is a curveball that has rattled the company, Visa has the financial strength to shrug off the effects of the pandemic. The only thing that may keep investors at bay is the premium valuation at which Visa stock is trading.
You’ll be hard-pressed to find an analyst or investor who doesn’t think that Visa is a good stock. However, the optimal price at which to buy the shares is up in the air. Buying stocks at the right price is one of the most critical factors in value investing.
Visa stock should produce attractive returns, but the shares are too expensive at the moment. I would wait for the stock market to drop, leading to a decline of Visa’s shares, before buying the name.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
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