How to Spot the Perfect Time to Buy Visa Stock

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On Thursday afternoon, the world’s largest publicly traded credit and debit card company – Visa (NYSE:V) — reported its second-quarter earnings results. While net income rose 26 percent to $1.6 billion, and while earnings per share rose 31 percent to $2.52 per share, the stock dropped about 3.5 percent in after-hours trading to $202 per share.

Is this a buying opportunity, or does the selloff reflect a genuine concern? If we dig beneath the headline numbers, we realize that Visa’s growth wasn’t as strong as it first appears. The sharp increase in profits is the result of a tax benefit, without which the company grew income at just 15 percent. Furthermore, revenues grew at just 7 percent.

If we look at some other metrics, we see a couple of other concerning issues. For instance, the company reported 12 percent growth in payment volume. If we compare this figure with the company’s 7 percent sales growth, we find that it is earning a lower average fee per transaction.

Given these points, we find that the company’s growth is decelerating on several fronts, and this means that the stock is worth less — the selloff is justified.

Furthermore, the selloff reflects the fact that Visa shares are overbought on a longer-term basis. The stock experienced its first real correction in years at the beginning of 2014, when it fell from over $230 per share to under $200 per share. While it has been bouncing off of its low, the fact that shares are up substantially over the past several years leads me to believe that the stock needs to correct further in order to chase out the momentum traders.

However, none of these things indicate that Visa is a poor investment longer term — far from it. Visa is a market leader, along with Mastercard (NYSE:MA) and American Express (NYSE:AXP), in the electronic payment industry. While this industry is experiencing some minor growing pains, the fact remains that a greater number of global transactions are taking place electronically, and this is a significant headwind for Visa and its peers.

The slowing growth reflects several factors, including a sluggish global economy and a decline in the amount of money Visa can earn from a single transaction. But I think these are short- to intermediate-term setbacks. Regarding the first point, a weak economy is going to hit most companies’ sales and profits, especially if their business comes from consumers and other businesses. The fact that Visa is still growing its sales and profits while several bellwether retailers are showing declines in these areas shows that the secular trend from cash transactions to electronic transactions is intact.

Regarding the second point, we have seen commodification impact several industries involved in new technologies, although this has generally been a temporary setback and not a game changer. An excellent parallel to this is the decline in the amount of money Google (NASDAQ:GOOG) received per click. Investors were extremely concerned about this at first, and they sold off shares. But this didn’t mean that Google’s business model was jeopardized in any meaningful way. Once investors realized this, they began to bid up Google shares again, and they hit all-time highs.

I suspect that we will see something similar take place with Visa. Visa needs to sell off as momentum traders exit their positions. But this should create an excellent buying opportunity for long-term investors. Given Visa’s long-term growth rate of about 18 percent, the stock starts to offer excellent value when it trades at 18 times earnings, or at about $160 per share. While I’m not sure that the stock will reach this level, I think it is an excellent price to back up the truck. Before that I would hold off, or perhaps buy in small increments.

Disclosure: Ben Kramer-Miller is long Visa.

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