Visa (V 0.05%) just put up more than respectable numbers to close out its 2022 fiscal year, and the market is reacting with little more than a shrug. Such is life in a bear market. It takes a lot of positive news to make a meaningful impact.
That being said, even after a big jump in earnings this past year paired with the stock's slump (Visa is down 17% over the last 12-month stretch as of this writing), this remains a premium-priced investment. The odds of an all-out recession are mounting for 2022, too. Is now the time to buy Visa?
Visa doesn't do economic forecasting
Speaking of recessions, Visa CFO Vasant Prabhu made a very notable point in the last earnings call. Prabhu emphasized this:
As we've said before, we are not economic forecasters. Clearly, there's a high risk of a global recession, but we do not have a specific point of view on if, when or the kind of recession we might have. For internal planning purposes, we are assuming no recession.
What does that mean if you are holding Visa stock? Well, the company just grew revenue by 22% and adjusted earnings per share by 27% in fiscal 2022. However, part of that surge was due to a rebound from pandemic disruption. By and large, Visa has maintained its pandemic rally is over as financials are well above 2019 levels.
This means growth going forward will return to a more historic norm. Management expects this to equate to a low- to mid-teens percentage growth rate in 2023. This includes the ongoing impact from the cessation of business in Russia, which occurred about halfway through fiscal 2022, so that will continue to be a slight drag on growth in the first half of this next year. Since Visa's spending on growth initiatives assumes a multi-year timeline until payoff, the company said it will try to maintain operating expense growth in line with revenue growth.
But again, it's worth bearing in mind that this outlook assumes no recession next year. In fact, it assumes spending across Visa's sprawling global network remains stable. If you think a global recession could strike in the near future, now may not be the time to buy this stock. Shares trade for 29 times trailing-12-month earnings, and 24 times trailing-12-month free cash flow. For reference, this is about as cheap as Visa stock has traded for in the last decade, but it's still a premium price tag that could get hit if a recession drags down the company's growth trajectory.
One more critical note
It isn't just a recession that poses a risk to Visa's growth rate. A record run-up in the U.S. dollar (a nasty side effect of the Federal Reserve's record interest rate hikes) has also been weighing on the digital payments network. You see, when a sale is made overseas, Visa has to convert it back into dollars for reporting purposes. When the dollar increases in value against other currencies, that equates to a lower value for that international sale.
This effect was already a drag on Visa in the last year. Total revenue grew 22% in fiscal 2022, but excluding currency exchange rates, revenue was actually up 24%. In other words, a strong dollar reduced revenue by two percentage points.
However, the dollar's reign is about to get even more tyrannical. Prabhu said this on the earnings call:
We faced very stiff exchange rate headwinds as we enter fiscal year '23. Based on where the dollar is today and the forward curve, exchange rates will reduce reported net revenue growth in fiscal year '23 by around four points.
While Visa is forecasting up to a mid-teens-percentage revenue growth rate next year, that is a currency-neutral forecast. Besides any effect from the pandemic, that four percentage point currency headwind could reduce Visa's actual reported growth rate into the high-single-digit-percentage growth range. Expect earnings growth to be reduced by a similar or greater amount as a result.
Don't miss the digital payments forest for the quarterly earnings trees
Given this suddenly pedestrian-looking forecast for the next year, I'm not sure Visa is a best-buy stock in my book. I own shares, and I'm happy to keep holding them, but I could see the stock falling further if the economy heads south.
However, the proverbial "war on cash" is still raging, and cash is steadily losing ground. While Visa is no hyper-growth company, a high-single-digit-percentage revenue growth rate over the next decade (and even higher earnings-per-share growth rate, thanks to share buybacks) is far from out of the question. Visa isn't perfect, but I still believe it to be a worthy stock as part of a digital payments and fintech investment portfolio. I'm holding as we head into what should be a wild 2023. And if a recession does hit and drag down share prices in the next year, that would likely tempt me into buying more for the long haul.
