Visa, Inc. (V) stock has been sailing in the rough seas following some industry developments that were not the firm's fault in any way. Visa was one of the clear losers after the historic July 31, 2013, ruling that overturned an earlier ruling that allowed the Federal Reserve to place a $0.21 cap on debit card fees levied by card companies such as Visa and MasterCard, Inc. (MA). The ruling will probably go down as the single most-important development to happen to "The Kings of Plastic" this year, and led to a massive decline of Visa, MasterCard and American Express shares. Visa shares tumbled a jaw-dropping 7.54% to trade at just $173 the day after the announcement. Interestingly, credit card purveyors such as American Express (AXP) that have zero-exposure to debit cards were also caught at the crossroads by the development, with the firm's shares tanking a significant 1.89%.
Since then, Visa shares have recovered nicely and currently trade at a respectable $191.04. The strong and rapid recovery has come as a surprise to many investors who could see no respite in sight for the firm back then; at least not in the near future. I had written a bullish article about Visa following the swipe fees ruling, where I predicted that the unfortunate blip could not hold Visa down for long. I gave the major reason for my optimism as the fact that it is banks that are the major beneficiaries of swipe fees, and not card companies such as Visa and MasterCard. Many investors are probably not aware of this. I was, however, not the only Visa bull since some near-term bulls were also undeterred by the sell-off. A good 58,000 calls changed hands on August 1, 2013, about 8 times the average daily volume;7,700 option contracts crossed the tape on that day, never mind that they were deep out-of-the-money. The calls were traded at a VWAP (Volume-weighted Average Price) of $191.69. This obviously means that the investors were betting on Visa shares moving North of $191.69 ($190 strike price + $1.69 VWAP). I'm glad to see that these bold contrarian investors are well on the way to reaping the fruits of placing their faith in the battered Visa shares.
Shares break key resistance
But all that is not important. What really matters now is that not only is Visa on an upward trajectory, but even more importantly, the company is on a growth warpath that can support even higher prices. The shares calculated key resistance stands at $181.50 with support around $172.21, meaning that the stock has already broken its resistance area and is in fact trading well above it. Several analysts such as Guggenheim partners had earlier raised Visa's price target from $205.00 to $220.00 and there is good reason to believe that this price is achievable in the near term. Let's see a few reasons why I remain bullish about Visa both in the near term and long term, and believe that the company's impressive growth is set to continue.
Innovating Virtual Wallets
Both Visa and MasterCard unveiled their digital wallets platforms in last year, several months after Google (GOOG) and Isis, a consortium that involves wireless carriers. MasterCard unveiled its PayPass service in May 2012. The platform allows customers to purchase products online by just clicking an icon or tapping their cellphones against a reader if they are in a physical store. PayPass will roll out in the third-quarter in the U.S, U.K, Australia and Canada.
Visa launched its V.me digital wallet in France, the U.K and Spain. The firm offers its payWave service as a traditional card or a small mini card.
The digital wallet platform is expected to enable customers with speedier checkouts while merchants such as Visa and MasterCard are likely to rack up sales since studies have shown that customers tend to spend more while using cards as opposed to when they are using cash. The platform has significantly high entry barriers that give the early leaders pricing power.
Prepaid cards remain a bright spot amongst financial products. The market for these cards grew 24% from $148.4 billion in 2010, to $184.1 billion in 2011, according to a report by Mercator Advisory Group. There is still plenty of room to run, according to a recent report by Companies and Markets.com, which predicts that the global market for prepaid cards will hit $ 2.1 trillion annually by 2018. This is great news for card companies such as Visa and MasterCard of course.
Nearly one out of five under-banked consumers prefer using prepaid cards instead of checking accounts when transacting. Prepaid cards are highly popular with college students.
The burgeoning middle classes in many emerging economies present a huge potential for electronic payment processing. According to a recent Gallup/World Bank study, only 7% of consumers in emerging markets currently have credit cards compared with 50% in more developed markets. Adoption rates in emerging economies vary widely and range from a high of 18% in Latin America to just 2% in Asia.
The Chinese credit card market is growing in leaps and bounds, with the market growing sixfold between 2002 and 2010, according to a report by Lafferty Group's World Cards Intelligence. Credit card transactions in the country grew a massive 156 times from just $4.8 billion to $748 billion in 2012. China is slated to become the largest credit card market in the world by 2015.
Building Business on Plastic
Bank lending in the U.S. has been weak ever since the global economic meltdown of 2008. Startup businesses, mom-and-pop shops and other mid-size businesses are being increasingly forced to resort to using credit cards in a bid to grow. This trend is likely to result in more business for credit card companies.
Corporate credit debt has been steadily growing, which makes it popular for larger businesses to accept credit cards. The average credit card debt for small businesses is estimated at $55,000 while that of medium-sized businesses stands at $100,000.
These industry trends will not only benefit credit card heavyweights such as Visa and MasterCard, which process transactions only but also companies such as Discover Financial Services (DFS) and American Express, which lend money and issue cards too. It is certainly a good time to be one of the leading card companies when you consider all the pent-up growth that can easily push Visa to even greater heights. Even though the stock has zoomed up from $150 to the current price of $191.04 in the past 9 months, it still has a significant upside of about 11%.