Visa's stock has a history of outperformance. How can it get working again?

By Emily Bary

Investors need more 'conviction' in value-added services and newer payment flows, as purchase volumes slow

Dating back to 2009, Visa Inc. shares have only underperformed the S&P 500 in three calendar years.

They're on track to do so again this year, in a meaningful way. Visa shares (V) are now in the red over the course of 2024, while the S&P 500 SPX is up about 14%.

Will Visa shares be able to get back to their usual outperforming ways?

Or, as Bernstein analyst Harshita Rawat asked earlier today, can Visa's stock still work if its global payment volumes are only growing by 7%?

She opined on Visa on Wednesday in the midst of what proved the stock's worst daily performance in more than two years. A 4% daily drop may not be that unusual for some stocks, but it is for Visa's, which hadn't posted one at or above that magnitude since May 9, 2022.

Investors are concerned about a slowdown in purchase volumes and Visa's ability to sustain double-digit revenue growth in an environment where volumes are, in Rawat's words, "anemic."

See more: Visa's stock falls as volume growth slows, but exec says trends are stable

With Wednesday's declines, Visa shares are now down on the year. (Shares of rival Mastercard Inc. (MA) are still clinging to a slight year-to-date gain.) Were Visa shares to end 2024 lower, that would mark only the fourth full-year decline dating back to the company's initial public offering in 2008.

"For Visa to be rewarded for double-digit revenue growth despite weaker consumer volumes, we believe it is important for investors to get conviction re: Visa's right to grow in [valued-added services] and new flows," Rawat wrote.

While Visa is best known as a card network that serves as a backbone of the global payments infrastructure, the company has been diversifying into higher-margin services offerings for areas like risk management and open banking, and moving more into non-carded purchases, such as those that help businesses pay one another.

Read: Amex's revenue from card fees topped $2 billion for the first time last quarter

Rawat noted that investors don't seem to have much "conviction around [the] durability" of those two areas, despite 23% revenue growth for value-added services in the June quarter and 18% growth in revenue from new flows.

But she's still bullish on Visa shares, with an outperform rating and $310 target price. "Secular growth concerns are somewhat overblown, execution is strong in VAS and new flows and relative valuation is at rock-bottom levels," she wrote.

William Blair's Andrew Jeffrey stuck with his outperform rating as well. "We submit that Visa has defensive characteristics that could support relative outperformance versus the market in a downturn, and 14% year-to-date relative underperformance reflects perceived better returns elsewhere, rather than structural company-specific earnings growth concerns," he wrote.

Jefferies analyst Trevor Williams also reiterated a bullish view, though he was less sold on the near-term path.

"While the [deceleration] in U.S. growth in July was attributed to transitory headwinds, cross-border is slowing, the overhang from merchant litigation is unlikely to lift near term and we view Street FY25 top-line [estimates] as increasingly at-risk," Williams wrote.

He and his team "struggle to see a near-term catalyst," though they think ultimately the stock at its current multiple would seem to be sporting a good entry point.

See also: Is this heavy-hitting American Express card worth the $695 fee? Yes, if you're in this group.

-Emily Bary

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07-24-24 1858ET

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