Is Visa stock protected against inflation and recession?

  • Strong tailwinds will allow V to weather the inflationary and recessionary environment
  • The reopening of China and Japan will boost profits despite the macroeconomic sluggishness
  • Despite strong earnings, V trades at 5-year low pER

Visa (NYSE:) is a global brand, but it appears to be a pro-cyclical business, with revenues tied to global demand. It might therefore be surprising that it outperforms the in the event of a global crisis. Yet Visa benefits from quite a few secular long-term drivers that enable reliable above- growth.

InvestingPro+ Price Performance History

Source: InvestingPro+

This year’s performance confirms this. Visa has lost 14.23% since the start of the year. By comparison, the S&P 500 is down 21.01% and the is down 29.42%. Despite these losses, the company remains one of the top 15 performers among megacaps. Thanks to its recession- and inflation-resistant business model, the payments network has outperformed the market in times of crisis since its IPO in March 2008. It will likely continue to do so.

Visa’s business model makes it inherently defensive

Visa’s performance is driven by its highly defensible business model characterized by recurring revenue, high incremental margins and high free cash flow. While COVID-19 has significantly impacted near-term growth, its business model is resilient in the face of and has proven to perform better in turbulent times.

Visa’s main driver is the global shift from cash to card payments. The global card penetration rate remains at just 54% and is growing at 2% per year, meaning Visa has an additional $11.6 trillion in annual spend to tap into. This trend can only accelerate, especially with the rise of online shopping.

As you can imagine, Visa is very dependent on consumer personal expenditure (PCE). As consumers increase their spending, the number and value of transactions on which Visa can charge fees also increases. You may think this factor will definitely drag Visa down in tough times. Surprisingly, the PCE has grown 3% above GDP over the past 20 years, during recessions and booms. So even if the global economy were to contract, say by 1%, the PCE would still grow by 2%.

Inflation is another of Visa’s driving forces. The payment network makes a fixed percentage on consumer transactions, so as the value of those transactions increases, so does Visa’s fees. So regardless of the level of inflation in the coming years, Visa will be able to convert most of that upside into revenue growth.

The final driver is real price growth. Although none of us notice (because the network fees are paid by the seller), Visa is quietly increasing its fees by about 1% per year, always finding new ways to hide the increase. .

So, thanks to the sum of its engines, Visa is growing its revenues by 9 to 10% per year on average. Of the four business drivers, only PCE would suffer in a global recession, while the others would continue to grow at their usual pace.

Visa revenue growth

Source: InvestingPro+

Short-term recessionary cushions

Given the gloomy outlook and the calls for recession, it is natural to wonder about the stability of Visa’s growth in the short term. A global crisis would most certainly impact the payment network, but there are two cushions to be aware of.

Travel spend is one of Visa’s cash cows. When you spend abroad, the fees are much higher: take rates are 6x or more than in standard domestic transactions. The easing of travel restrictions helped Visa fare reasonably well despite the late macro turmoil as outbound spending hit unprecedented highs. While some think the boom is already over, that seems too fast given that China and Japan – which account for 15% of cross-border payment volumes – remain closed. Currently, APAC is only tracking 70% of 2019 travel spending levels; there is still a lot of room for maneuver since the rest of the world is already at 180% compared to 2019.

The second cushion is much more interesting. A payment network, in its most basic form, is simply a server, which means computers account for a large portion of Visa’s capex. What’s special about computers is that, every two years, technology allows us to make them twice as powerful and half as expensive, as Moore’s Law dictates (Gordon Moore, co-founder of Intel (NASDAQ:)). If computer capacity quadruples every two years at the same cost but transactions grow only 9-10% per year, payment networks can reduce their IT expenditures each year while still growing to maximum capacity. Very few companies – and perhaps none of this size – can afford to significantly reduce their costs every year without sacrificing growth. This puts massive upward pressure on margins, which are 68% (operating). But more importantly: when times get tough, Visa can still reduce capital expenditures and protect profits with very little repercussion. COVID is a prime example. As you can see below, Visa has reduced its spending from around $250 million to just over $150 million to deal with the pandemic.

Visa Capex Chart

Visa Capex Chart

Source: InvestingPro+

Is it worth the price?

All the advantages described above come at a price, of course. Trading at a price-to-earnings ratio of 25.2x (forward), Visa is not cheap. But Visa is never cheap. The question is whether it’s going to give you enough bang for your buck.

Visa's Historical PE Multiple

Visa’s Historical PE Multiple

Source: InvestingPro+

As the chart above shows, Visa is currently trading at its lowest P/E ratio in five years. It is also more than one standard deviation below the 5-year average; it would be difficult for the stock to become even cheaper.

Visa Fair Value by InvestingPro+

Visa Fair Value by InvestingPro+

Source: InvestingPro+

InvestingPro’s models show a possible upside of 15.3%, while the average analyst estimates gains at 39%. And that’s in today’s tough market. With strong tailwinds and trading at a relatively low P/E, Visa appears to be a resilient stock well positioned to outperform the market in times of heightened macro uncertainty.

Warning : The author has no position in the stocks mentioned.

The article is in French

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