<p>I have recommended Visa (NYSE: V) shares on this site dating back to 2017. And Visa shares have been a strong choice. Shares have risen 125% over the past three years, more than tripling the return on the S&P 500.
Source: Teerawit Chankowet / Shutterstock.com
I actually called V shares to buy and hold for life. I have recommended it when it was expensive and when it got cheaper. And I take up these recommendations so as not to pat myself on the back; Like all investors, I have also missed some calls. (Suggested investors sell Shopify (NYSE: SHOP) for $ 139 is probably at the top of the list).
Rather, I mean establishing my bona fides as a long-term visa bull. Because even as an investor who believes wholeheartedly in the visa industry, I will acknowledge some concerns about the current valuation assigned to visa shares. At almost 28x next year’s calculation of consensus earnings per share, the share is more expensive than it has been since its IPO in 2008.
Of course, almost all quality stocks are more expensive than 12 years ago – or even three years ago. It had not been much of a problem until Monday. Investors who see the sale as an overreaction should stick to the V share. Everyone else, however, can see reason for caution.
Small cause for concern …
As for the V population itself, the bull fall is almost self-evident. Visa will dominate the credit card industry with over 40% market share globally in 2018. Mastercard (NYSE: MA) is a solid share, but still far behind.
As we move to a “cashless” economy, more and more transactions will go through Visa’s network. It strengthens the company’s exposure to macroeconomic growth in developed markets.
At the same time, the company continues to drive growth in developing markets: revenues in Central Europe, the Middle East and Africa increased by a staggering 22% during the first quarter of fiscal policy, according to the latest conference call.
This is simply a company that will grow for several years. Valuation aside, it is one of the best companies in the entire market. And in this bull market, attention to the quality of the company, not the profit multiples allotted to the stock, has been the right strategy.
… But some causes for concern
That being said, even after a decline of almost 5% on Monday, this is a stock priced for perfection. And it is worth noting that the financial result for the first quarter was not perfect. A Wedbush analyst called the report “an unusually weak quarter” for Visa. The company also forecast slightly higher payment incentive payments than expected during the 2020 financial year.
In fact, the V share fell after the Q1 release. Of course, as has usually been the case in this bull market, stocks quickly recovered their losses. But Monday’s decline puts V-share below where it was traded before the report.
Given the imperfect nature of the income release, that decline does not seem illogical. And again, these would mean that you have to spend for these processes. A valuation of 28x futures earnings is one that is attributed to younger, smaller growth stocks just a few years ago.
That’s a big multiple. It is one that seems unlikely to expand much further. Of course, I said that in June, when I argued that while the V share was still a buy, investors needed to lower their expectations in terms of valuation. The V share has risen another 17% since then.
What will investors pay for V shares?
I am tempted to repeat that argument. It seems unlikely that Visa shares can say a 35x price-to-income multiple. If there is a ceiling on the P / E multiple, it is something of a ceiling on V-layers.
To be sure, given double-digit annual earnings per share growth, V may still provide a market-yielding return in that scenario. But this is a stock that has risen and risen by 835% over the past decade. I would again argue that investors must expect returns to decline.
But at the end of the day, it may be the market, less than the business, that determines the V share price, especially in the short term. We already see it, with V following the market over the last three sessions.
And as with high-quality, expensive giants like Microsoft (NASDAQ: MSFT), Mastercard and Nike (NYSE: NKE), there is a reasonable debate about valuation. It is fair to wonder whether a slowing double-digit growth can really support a share price that is 28 times futures income and an even higher multiple to free cash flow.
At some point, investors will stop paying ever higher multiples for quality, as they have done for this bull market entering its 12th year. The big fear is that such a point has come – which will be a problem even for one of the market’s best stocks.
Vince Martin has been covering the financial industry for almost a decade for InvestorPlace.com and other stores. He has no positions in the other mentioned securities.