- Visa stock has come under pressure due to downbeat guidance.
- The slowdown in growth is likely to be temporary.
- Visa stock still remains a good investment opportunity.
The stock of card payments major Visa has taken a beating in last few trades, in spite of reporting a beat on both revenue and EPS estimates. The negative sentiment is mainly due to the delay in the Visa Europe acquisition and the downbeat guidance which Visa gave for the second half of the year. The guidance shows a slowdown in growth and a hit on EPS. But does the downbeat guidance change the bullish narrative to a bearish one?
Earlier in the month, Visa reported an EPS of $0.68 on a revenue of $3.63 billion which marginally beat the analysts’ consensus of an EPS of $0.67 on a revenue of $3.6 billion. While the numbers were good the commentary that followed was not so pleasant.
Visa reduced its second half nominal revenue growth guidance from high single digits, with Q3 growth likely to come in at around 2%-3%. The drastic slowdown in growth is mainly because last year Q3 had an unusually low consumer incentive spend of 16% while this quarter will have a higher than average consumer incentive spend of 19%. This is an anomaly and nominal growth will revert back to first half average in Q4.
Another reason for the slowdown in revenue growth was subdued consumer spending in the US, contributed largely by low oil prices. But the situation may change going forward. Not only has oil prices shown some firmness, wages across the United States have been rising. This will improve consumer sentiment and in turn consumer spending.
On constant currency basis, the revenue is likely to grow by 8% in the second half. The revenue guidance implies an unfavorable currency impact of around 3%. The USD has already declined this year and the recent decision of the Fed to hold the interest rates stable will further weaken the dollar. Agreed that this will not remove the currency headwinds completely but will definitely improve the growth rate.
Profitability will also take a hit due to delayed Visa Europe acquisition. Visa will have to bear the $125 million interest expense without any counter benefit from Visa Europe. This will impact earnings by 4 basis points. However, EPS will still grow around 14% on nominal terms and 18% on currency neutral basis.
Visa still remains a great company with high profitability and good long-term prospects. Visa’s operating margin stood at 66% in Q2 and will remain around the similar level in the coming quarters despite strong headwinds. This level of profitability is much higher than its peers and is one of the main attraction for investors. On the revenue front, the company will experience a tailwind from the continued push towards electronic payments and adoption of Visa checkout. On an average, a customer using Visa Checkout completes 30% more transactions than the regular user. Analysts expect Visa’s earnings to grow around 15% for the next 5 years.
Visa’s balance sheet continues to be strong. While the company has taken on a debt of $16 billion a couple of quarters back, it has not affected its credit rating as the debt-equity ratio still remains low. And the company continues to generate good cash flows. Visa expects to generate around $7 billion in free cash flow this year. And impressively, Visa has retained its cash flow figures in spite of reduced revenue growth.
All in all Visa stock continues to remain a good investment story. The company has a solid profit margin and good revenue opportunities. While the delay in acquisition of Visa Europe has impacted its near-term profitability, the integration of Visa Europe will create a strong growth opportunity for Visa.