Last week, the credit card company launched the largest-ever U.S. IPO, and the stock has since soared 42% -- in the midst of the credit crisis, a terrible economy, and a bear market. Several banks, including JPMorgan Chase (NYSE: JPM ) , Bank of America (NYSE: BAC ) , and Citigroup (NYSE: C ) , profited significantly from the IPO, with JPMorgan alone pocketing more than $1.3 billion.
Visa stock was initially offered one week ago at $44, and it closed yesterday at $63.96. There's always bidding excitement following an anticipated IPO. But after the excitement fades, is Visa really worth the price?
Visa wasn't well-received by accident. It has a tremendous global business. The company doesn't lend its own money, so it doesn't assume any credit risk -- it just collects fees by managing transactions. According to Marketwatch, Visa fields 38% of all credit transactions and 48% of all debit transactions. Those numbers are expected to grow, because of a global trend away from cash toward credit and debit cards. Visa just collects tolls on the money highway. In fact, Morningstar analyst Michael Kon estimates that Visa's revenue could grow an average of 12% for the next eight years.
Perhaps the sexiest thing about Visa is the stock-market performance of its rival MasterCard (NYSE: MA ) . Since its IPO in 2006, MasterCard has appreciated more than 470%.
But my opinion, Visa also faces two huge risks. The first is litigation; the company set aside $3 billion of the more than $17 billion raised on the IPO to cover pending lawsuits over the amount it charges merchants. It could wind up needing a lot more. Second, the business is economically sensitive. True, the more transactions people make, the more money Visa makes -- but the opposite also applies, and the economy isn't looking too hot at the moment.
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Visa has a great business, but you've sure got to pay for it. In 2007, Visa earned about $1.50 per share. If the company increased earnings by 12% to $1.68 at the end of its 2008 fiscal year, the forward P/E ratio would be 37. Even if it earns $2 per share in 2008, that's still 32 times 2008 earnings, making Visa one expensive large-cap stock. Even MasterCard sells at less than 30 times 2008 earnings.
It just seems crazy to pay top dollar in this market. There are just too many fire sales going on to pay 32 times earnings for a large company. I wouldn't buy it here. But in the interest of full disclosure, I thought Google was too expensive after its IPO, too.