Counterintuitively, antitrust lawsuits often have little significance for a stock.
The U.S. Department of Justice (DOJ) is coming with a hammer for Visa (V 1.00%). The department alleges that Visa has monopolized the debit card market, forcing out competition to maintain its 60% share in the U.S. In reaction to this news, Visa stock initially slipped, though it has since recovered.
While lawsuits can be scary for investors, Visa has been in this position many times before. Does that make it the right time to buy the dip on this dominant payments stock?
Monopoly or moat?
The DOJ lawsuit against Visa has two main points. First, it alleges that the company is making exclusionary deals with its merchant customers (i.e., your local coffee shop). The agreements penalize merchants who allow payments from other debit card networks, thereby insulating Visa from the competition and maintaining its 60% U.S. market share.
Second, the lawsuit claims that Visa is using friendly agreements with technology companies, such as Apple, to prevent them from trying to circumvent the Visa network with their own payment solutions.
While these two allegations may have merit, it’s unclear whether a settlement to resolve them would lead to Visa losing market share. The company has an incredibly wide competitive advantage — otherwise known as a competitive moat — that’s more than just exclusionary deals and strong-arming rival technology platforms.
Billions of people already have a relationship with a Visa card, with tens of millions of merchants around the world accepting payments from them. Will any competitor be able to convince all these customers, issuing banks, and merchants to suddenly switch to a competing platform? I doubt it.
It’s not like Visa charges exorbitant fees, either. The DOJ threw out a large $7 billion figure in the complaint. It’s estimated there is about $5 trillion in payment volume on debit cards every year in the U.S. Visa, with a 60% market share, processes about $3 trillion of that.
But Visa only getting a slim 0.23% take rate on U.S. debit card transactions. In return, it makes sure all payments are processed instantly with fraud protection. This doesn’t seem like exorbitant price-taking at all.
Attacked by governments all over the world and still succeeding
Visa has been in this position before, which should alleviate investor concerns over this lawsuit. In 2010, it had to comply with the Durbin Amendment, which limited the transaction fees imposed on merchants by debit card issuers. This constrained Visa’s operations, and kept the company from raising prices. And yet, the business is still doing just fine.
Worldwide, governments have built homegrown competition to Visa and other debit/credit card networks. India has RuPay and UPI; Brazil has Pix. These were all established to try and circumvent the fees paid to the likes of Visa. And yet, the company keeps growing.
Last quarter, Visa’s payment volume rose 7% year over year in constant currency. Debit cards in circulation were 3.2 billion, up from 3 billion a year prior. That means more than 200 million debit cards were added to the Visa network in the prior 12 months. This doesn’t look like a business that’s struggling because of government interference, but one that’s thriving despite it.
V Price-to-Earnings Ratio data by YCharts.
Is the stock cheap today?
I believe Visa’s revenue and earnings can keep growing for the foreseeable future. It will happen in step with the expanding global economy and consumer spending.
If people keep getting wealthier and have more disposable income to spend, it will lead to increased payment volume for Visa. Increased payment volume will lead to revenue and earnings growth. It’s that simple.
The problem is, Visa stock doesn’t look that cheap for a gigantic mature business. At a current market cap of $565 billion, Visa has a price-to-earnings ratio (P/E) of about 31.
This is a high-quality business, but not one that will generate hypergrowth during the next 10 years. Investors shouldn’t panic sell because of another lawsuit from the DOJ, but it doesn’t look like Visa stock is cheap right now, either.
