Visa, Inc. (V)

PouyaZ (< 20) Submitted: 4/08/08 5:32 PM : Start Price: $62.52 V Score: 17.83

Let’s cut the chase. The only two credit card companies worth owning are Visa and MasterCard. One of the main reasons is due to their business model of making money off of transactions and not exposing themselves to credit risks. This is a very important as they are not as directly affected by the inevitable future debt or credit bubble. In addition, historically Visa doesn’t do poorly during a recession. I am bullish on MasterCard, because it is a great stock to own. Visa, however, is better and is best of breed. Do you know what happens to best of breed stocks? They go up. Since Visa very recently had its IPO, however, it doesn’t have the benefit of objective statistics to reflect its present superiority. This requires you to evaluate the stock as a company rather than picking it because through some stock screener.

Before I continue, however, let us get something straight off the bat, Visa is not going to increase 400% like MasterCard. At least not yet. Visa's IPO was being priced to match current Mastercard’s valuation taking into account its 400% increase. The $44 Visa IPO price was actually at a $5 premium over Mastercard's current valuation (true equivalent would have been between $38 and 42). The only reason the Visa's current stock price is so much lower is because it has more shares outstanding. Thus, the likelihood of Visa increasing 400% is roughly the same as Mastercard trading at ~$800 per share. This is unlikely.

Long term, Visa is a great play and a better play than MasterCard, because Visa is significantly larger than MasterCard and has a significant advantage on the US debit card market which is responsible for the most domestic growth. In addition, and more importantly, Visa is being more aggressive in both Asia and Latin America than MasterCard. Also, another important, albeit minor, note is that Visa is the official credit card of the Olympics. Guess how many transactions are going to be made because of the Olympics and who is going to benefit from it most?

Short term, Visa is going to be volatile and its stock is going to fluctuate. It has already touched $69 and may even regress down towards the mid to low 50s. Despite this, it has still increased over 50% from its IPO price and 20% from its opening day secondary market price in less than one month. This is very good for a stock not in the energy or commodities sector.

The analysts that are bearish on Visa tend to focus on short term gains and point to the fact that MasterCard is cheaper and therefore a better buy. I don’t find their argument persuasive because:

(1) Although one stock may outperform the other, the success of both Visa and MasterCard is not mutually exclusive (e.g., the credit card pie itself is getting larger and both V and MA are outperforming the other competitors). Accordingly, I am bullish with both V and MA.

(2) Those bearish on Visa and bullish on MasterCard, such as Jim Cramer (which, statistically, is wrong 52% of the time) have watched from the sidelines as Visa’s oscillating stock price has statistically doubled MasterCard performance in the short term and this is a long term stock.

(3) Those bullish on Visa since day one had the chance to buy Visa at $55.00 within hours of it opening and if they held it until now they would have about a $25% gain. Bearish analysts, such as on Fast Money, were bearish on Visa and so missed the opportunity and think they are smart by recommending to wait for a pullback from its current high 60s price to a mid 50s price before you buy. So, at the end, the person who is bullish on Visa has a 25% gain and the person who is bearish is hoping that the stock will drop 25% so that he could purchase it for the price he could have gotten since day 1 and was bearish about at that time. If the Visa stock never drops for the bearish investor, he is out of luck and missed an opportunity.

(4) Visa is best of breed and has much better growth.

(5) Many of the same analysts recommended Yahoo over Google for the same reasons when Google was going public. We all know how that turned out.

Overall, you have to look at the upside vs. the downside. Could it dip to the IPO price, yes, that is possible. However you are taking a risk and assuming that it is going to dip to that level. What if that never happens? Then you let an opportunity go by, because you were greedy. Even if it dips back towards the IPO price (let’s say after Visa’s quarterly earnings or as more analysts cover the stock), how much do you think the stock is going to be worth in, for example, three years? We know the stock is going to go up by a lot over the long term, but we are not as confident that it will go down. Thus, the best investment strategy would have been to get in on the IPO ($44), or bought it within the first few hours of trading ($55 to $59.50) and just hold it for years.

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