Visa (V 0.31%) is one of the largest global payment technology companies in the world. Its name is synonymous with convenience and reliability, and its cards are accepted by a wide variety of merchants and retailers around the globe.
The payments giant recently reported an impressive full-year 2019 result, with net revenues up 11% year over year and GAAP net income up 17% year over year. For a $394 billion company to be able to report double-digit growth in both revenue and net income is truly outstanding, and Visa's operational statistics also paint a very rosy picture. Payments volume for the year was up 5.7% year over year to $8.78 trillion, while processed transactions in the fourth quarter of 2019 saw an 11% year-over-year jump to 53.2 million transactions. Since Visa makes money from both the number and total value of transactions, these numbers are indeed encouraging for investors.
Visa feels like an unstoppable behemoth, but let's slow down a little and think about the company's valuation. Could the business be getting a little too expensive for comfort?
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High valuation and optimistic guidance
At a share price of around $185 and with an FY 2019 reported GAAP earnings per share (EPS) of $5.32, Visa's shares are trading at a lofty price-to-earnings ratio of around 35 times. Though investors might argue that close competitor Mastercard (MA +0.23%) is trading at a slightly higher price-to-earnings ratio of 38 times, the fact is that Mastercard did report stronger year-over-year revenue and net profit growth compared to Visa for its Q3 2019 earnings.
The company's guidance indicates confidence in continued growth. In its FY 2019 presentation slides and conference call, Visa estimates that annual net revenues will grow by a low-double-digit percentage, driven by a renewed increase of Visa's payment volume. The renewal of 30% is much higher than an average year where 20% of payment volume is renewed. This positive trend will flow through to earnings per share, which is forecast to increase by a mid-teens percentage.
Assuming a mid-teens percentage boost to earnings-per-share (EPS) in FY 2020, EPS for next year will be around $6.10, which will lower the price-earnings ratio from 35 times to just 30 times at the current share price. This makes the company's valuation somewhat more palatable once this net income growth has been factored in.
Multiple acquisitions to power growth
Investors should also note that Visa made a number of strategic acquisitions this year. In June, it acquired Verifi, a technology solutions company that reduces charge-backs. Visa will combine Verifi's dispute resolution tools with its own suite of risk and fraud management solutions to extend support for a broad range of payment brands.
Just a month later in July, Visa acquired Payworks, a Munich-based provider of next-generation payment gateway software. Once it's integrated, Visa's clients will be able to offer a unified payment experience for their customers, both in-app and online.
Visa acquired Earthport in August to provide cross-border payment services to banks and money transfer service providers. Visa will work with Earthport to simplify payment processes for payroll processing across borders, for instance. This ensures that contractors and employees around the world can receive fast and secure payments.
With these and other acquisitions during 2019, it seems Visa has been busy bolstering its capabilities and extending its reach across different platforms and use cases.
Big fish in a big pond
Visa exists in an oligopolistic industry -- one that is dominated by just a few large players. This gives it an unnatural hold over merchants and card-issuing banks and allows it to extend its business to far-flung areas of the world, many of which are still acquiring the necessary infrastructure and security systems for credit and debit card payments.
It can be argued that Visa's high valuation is justified because the company's runway for growth is still long and the addressable market remains large. Along with strong forward guidance and a string of synergistic acquisitions, these reasons make Visa one of the top stocks to own for the long term. Visa's shares may already have soared by close to 40% year-to-date, but without any negative catalysts on the horizon, there isn't much reason to avoid the stock. Investors would be wise to buy in now as valuations are still reasonable considering the company's strong market position and dominance, as well as its great long-term growth prospects.
