The upcoming $19 billion IPO of Visa is kind of a big deal.
In fact, if all goes as planned, it would be the largest IPO in U.S. history, larger than AT&T Wireless ($10.6 billion) in 2000 and Kraft Foods'
The current credit environment is shaky, but ironically, that is not a major concern for Visa. Like rival MasterCard
This model differs from that of Discover
It is this card processor model that has everyone so excited. Shares in MasterCard are up nearly five times its IPO price and sit around $200 a share. Although shares in MasterCard are slightly down, along with just about everyone else, the company has managed well in light of the credit turmoil.
Cheery news for the banks
The Visa IPO has plenty of individual investors excited, and it could be a much-needed shot of adrenaline for some major banks. Major Visa stockholders include JPMorgan
And if the IPO is as successful as MasterCard's, the major bank stockholders could gain a further windfall from the future sales of Visa shares.
More caution for the individual investor
Visa, as a business, offers long-term investors some excellent economic characteristics. The Visa brand is internationally known, and the company boasts the world's biggest retail electronics payments network. According the SEC filing, Visa's partner banks had issued nearly 1.5 billion Visa cards.
Even more, Visa offers a strong recurring revenue stream: fees paid each time a transaction is processed and paid to Visa by the issuing banks. So even if consumers were to stop using Visa cards to buy discretionary items, most will use them for gas and groceries, which still earn Visa a fee. Visa commands more than 40% of the U.S. market in credit and debit cards.
Visa's strong fundamentals bode well for the long run. It's virtually impossible to think that Visa would disappear in the next 10 years, given its massive worldwide network and brand recognition. Yet it is exactly these strong points that should warrant more caution. With so much hype, Visa will likely experience heavy investor demand right out of the gate, which will cause the stock price to surge. Do your homework first before blindly committing funds. Remember, price is what you pay, and value is what you get.
From the billions that Visa will raise from the IPO, about $3 billion will go to litigation costs from lawsuits of a few years ago. The allegations were that Visa's size and dominance enabled the company to exert unfair influence on the fees merchants pay to complete transactions via Visa's payment system. Continued legal costs could certainly tarnish the company's profitability.
Don't pay an expensive price for a cheery consensus
Yes, Visa is a wonderful business that will be fine for years to come. But that doesn't guarantee it is a wonderful investment at any price. If you are interested in the IPO, spend some time understanding the pros and cons of the company.
For more Foolishness on the charge:
Discover is an Inside Value recommendation. Bank of America, JPMorgan, and Kraft are Income Investor recommendations. You can take a 30-day free trial of either newsletter by clicking on the links above.