In its fiscal 2023 second quarter (ended March 31), Visa (V -0.23%) posted revenue of $8 billion and diluted earnings per share (EPS) of $2.03, both of which exceeded Wall Street analyst estimates.
Moreover, both of these headline figures represented double-digit-percentage gains from a year ago. The signs point to this card payment giant performing extremely well on a fundamental level.
The strong momentum has helped drive Visa's shares up 19% over the past 12 months, roughly in line with the broader S&P 500 index. But what could the next year look like for this top financial stock? Here's what investors need to know as we look ahead.
Image source: Getty Images.
The threat of a recession
Visa's recent growth has been outstanding given the uncertain state of the global economy. The business handled an insane $3 trillion of payment volume in its latest quarter, up 10% (in constant currency) year over year, a sign that spending remains healthy.
And it's hard not to get excited about the company's incredible operating margin of 67%. This is one of the most financially sound enterprises in the world.
Key to Visa's recent momentum is the resurgence in travel demand. Cross-border payment volume (when a cardholder's issuing bank and the merchant's acquiring bank are in different countries) soared 24% in the second quarter. This demonstrates consumers' willingness to travel, especially after the pandemic forced people to shelter in place for much of the past three years.
This is a good thing for Visa right now, but with the threat of a recession on the horizon, discretionary spending could be pressured in the near term. This means travel could turn from having a tailwind to facing a headwind. And because the business earns transaction fees based on how much its cards are used, less use would translate to less revenue.
But according to Wall Street analysts' consensus estimates, Visa's revenue is projected to rise 11% in fiscal 2023, with diluted EPS up 19%. If these estimates prove to be correct, they would definitely still be strong gains, which could support a higher stock price.
Valuation must be considered
Over long periods of time -- at least five years out -- a company's fundamental performance, like sales and profits, drives the stock's returns. But over a much shorter time horizon, like 12 months, valuation is much more crucial.
In other words, changes in investor sentiment can have a huge impact on how shares move. And this is extremely unpredictable. It seems like one moment, everyone is panicking as the market tanks, and worries about an economic downturn run rampant. And the next moment, the market enters bull territory, inflation is cooling, and investors aren't so scared anymore.
As of this writing, Visa's stock trades at a price-to-earnings (P/E) ratio of 30.3. That's about in line with its average valuation over the past 12 months, and cheaper than the average P/E over the past three years. But its shares have done quite well since October of last year, when they sold at an attractive P/E near 25.
On one hand, a valid argument can be made that Visa's current valuation, which is a huge premium to the S&P 500's P/E of 19.8, presents some downside risk should economic headwinds become more of a problem and the financials take a hit. After all, the business is dependent on spending activity. If revenue or earnings come in below expectations, shareholders could run for the exits.
But on the other hand, a more compelling argument, in my opinion, centers on this being one of the best businesses in the world, which can navigate any challenges that might come its way. In the last decade, Visa has produced a stellar return of 396%. And during the 10-year period between the start of 2013 and the end of 2022, the stock has only had two down years, in 2021 and 2022 -- both showing declines of less than 5%.
Investing is a long-term game, to be clear. But given Visa's superb track record, I think it's more likely than not that its shares will be up by double digits in the next year.
