Visa stock drops after disappointing earnings: Buy the dip?

Key points

• Visa posted a 20% earnings increase in its fiscal third quarter.

• While revenue was up 10%, it was short of analysts' estimates.

• Visa stock was down 3% Wednesday. Should you buy the dip?

The world’s largest payment processor saw its stock price plummet after it missed revenue estimates.

Stocks were tanking on Wednesday, particularly the Nasdaq, which fell some 540 points, or 3%, while the S&P 500 was down 100 points, or 1.8%. Disappointing earnings from some mega cap stocks, including Visa (NYSE: V), likely contributed to the selloff.

Visa had solid numbers in its fiscal third quarter, but it missed revenue estimates. The payment processor generated $8.9 billion in revenue, up 10% year-over-year, but it slightly missed estimates of $8.92 billion.

Net income rose 17% to $4.9 billion, while earnings per share jumped 20% to $2.40 per share, which was in line with estimates.

So, the results were somewhat mixed, but revenue misses are rare for Visa, which likely caused its stock price to fall some 3.7% on Wednesday to $255 per share. Year-to-date, Visa stock is now down 2.3% for the year.

It has been a difficult year for Visa, but does this latest dip present a buying opportunity for investors?

A rare revenue miss

The last time Visa missed revenue estimates was in 2020, according to Bloomberg, so it is a rare event, indeed.

However, keep in mind that Visa did grow revenue by 10%, just not as much as Wall Street analysts expected. The reason it disappointed on the revenue front was that payment volume came in lower than anticipated.

Payment volume, the amount spent by Visa cardholders, increased 7% year-over-year, but that was a little below what analysts had anticipated. Further, payment volume was roughly similar to Visa’s fiscal second quarter ended March 31.

“In the U.S., while growth in the high spend consumer segment remained stable compared to prior quarters, we saw a slight moderation in the lower spend consumer segment,” Chris Suh, Visa CFO said on the Q3 earning call.

The slow down in the “lower spend” consumer category, which means moderate-to-low-income individuals, is likely due to the higher rates on credit cards, causing consumers to spend less.

Meanwhile, cross-border volume rose a hearty 14% year-over-year, while the number of processed transactions increased by 10%.

Lower interest rates should help

Visa did not change its revenue growth guidance for the full fiscal year, keeping it at low double-digit growth with earnings per share growth expectations remains in the low teens.

It did, however, lower its expense growth range to high single-digits to low double-digits, from low double-digits in the previous quarter.

For its fiscal fourth quarter ended Sept. 30, Visa expects low double-digit revenue growth and the high end of low double-digit earnings growth — same as Q3.

If the federal Reserve lowers rates as anticipated, that could provide a boost in consumer spending and payment volume for Visa.

Should you buy the dip?

Several Wall Street analysts lowered their price targets for Visa, based on the expectation of continued slower growth. Yet, most maintained their buy ratings, with a median price target of $310 per share, which would be a 21% increase over the current price.

Even the low end of the price target range, $265 per share, would result in 4% growth from the current level.

We tend to agree, as today’s selloff had more to do with overvalued tech and large-cap stocks than Visa itself. No, the numbers weren’t great, but Visa has historically been one of the most consistent growers on the market with its duopoly in the credit card space, low overhead, and high margins.

The fact that it is relatively cheap right now, with a P/E ratio of 28, down from 32 in March, and a forward P/E of 23, makes it a good time to consider Visa. Today’s selloff presents a solid buying opportunity for investors.