Investors have been euphoric after the Visa Europe integration, which provided an annualized one-time boost to revenue growth and thus was being used as an incorrect growth comparator.
Visa’s management has now forecasted continued revenue growth in the high single digits with EPS growth in the mid-teens, artificially high due to share buybacks.
The latest quarterly results corroborated my slowing growth thesis which is a sharp divergence from past double-digit revenue growth.
With revenue growth rates slowing to single digits and the stock boasting a P/E in excess of 40, I feel that further appreciation is unjustified.
I’ve written a series of articles laying out my thesis regarding Visa’s (V) impending growth slowdown coming in FY2018. Although the stock has appreciated beyond some of the most bullish predictions since I proposed my slowing growth thesis, slowing growth has come to fruition. I will admit, thus far, I was wrong and the vast majority of readers were right as the stock moved contrary to my slowing growth thesis. Despite this move, growth has in fact slowed to single digits and will remain in the single digit range for FY2018. My thesis was rooted in the fact that post-Visa Europe integration numbers were being used as an incorrect comparator since the business model had shifted to absorb the European arm. Post-Visa Europe numbers were measured against pre-Visa Europe numbers as an incorrect barometer for future growth. Now that Visa has annualized year-over-year post-Visa Europe numbers, these growth rates have slowed, as predicted, to a single-digit growth rate. My prediction was that growth would slow (not stop) starting with Q1 FY2018 numbers which has come to fruition. Investors have become overly enthusiastic about Visa’s growth prospects. The stock has appreciated more than 40% over the past year.
Visa is overvalued with diminishing growth
Visa’s stock price is misaligned with its overall revenue growth prospects with unjustified P/E and PEG ratios. All these metrics remain higher than the majority of large-cap growth stocks that have a greater growth profile. Visa’s management guided for continued revenue growth in the high single digits with EPS growth in the mid-teens, artificially high due to share buybacks. This forward-looking revenue growth rate is a shape divergence from the past year-plus revenue growth numbers. As I posited previously, Visa’s growth rate is slowing, now confirmed by Visa’s management and thus misaligned with the stock’s ~40% appreciation over the past year, P/E ratio, PEG ratio and overall revenue growth prospects.
Visa just recently reported quarterly results for Q1 FY2018, with beats on both the top and bottom lines. EPS and revenue estimates were beat by $0.10 and only $20 million, respectively (Q1-2018-Financial-Results). Visa had set new all-time highs of ~$125 per share leading into the earnings report. Despite these beats on both the top and bottom line numbers, the stock responded by selling off 4% or $5 per share. Investors have been accustomed to year-over-year quarterly revenue growth in the double digits over the past year. This was due to post Visa Europe acquisition and integration. For year-over-year revenue comparators post Visa Europe integration, FYQ4 2016 growth was 19% followed by FY2017 revenue growth numbers with FYQ1 at 25%, FYQ2 at 23%, FYQ3 at 26% and FYQ4 at 14% (quarterly-earnings). FYQ4 2017 was a far departure from the previous 4 quarters of growth and now with FYQ1 2018 numbers reported at 9%, clearly this is a different growth narrative Visa-2017-Annual-Report. FY2018 is off to single-digit year-over-year revenue growth and remain the case for the remainder of FY2018 (Figure 1).
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