The Visa IPO: Taking a Wait and See Approach

The Dow was down nearly 300 points Wednesday lead by commodities with Gold making its biggest drop since June of 2006 and Crude Oil down nearly 5%. Yet Wall Street still managed to pull off the Largest IPO in US history. Late Tuesday Visa (V) priced the 406 million shares of its Initial Public Offering at $44 per share, raising $17.9 billion in the process.

The following morning (Wednesday) the stock made its market debut at $69 before trading a whopping 177 million shares on the day. The stock cooled off slightly as the day went on but still closed up an impressive 28% at $56.50. Great news for the lucky few who were able to get in on the IPO, but for the average Joe investor, how do you play this?

Well, you could have bought in Wednesday morning and then lost 18% on your position… probably not the best strategy. Or you can sit back on the sidelines for a while until you can evaluate this company in more depth and figure out what direction the market is going to take this stock.

Everyone wanted a piece of this IPO hoping that they were getting a piece of the next MasterCard (MA), which is up over 350% since its IPO in May 2006. There was no way that it was going to be able to hold up the highs from Wednesday morning trading 177 million shares, especially in the tape we saw overall Wednesday. If you want to play Visa, wait for the stock to come in a bit before you start to build a position. And buy in small blocks so you can lower your cost basis if the market gives you the opportunity. At this point there isn't much data on the stock in terms of revenue, income, cash flow, or prospective top and bottom line growth. As with any stock you should do your homework and evaluate the fundamentals before making a final decision.

Visa makes money through transaction fees which are cashed in every time a cardholder makes a purchase. And with more and more people paying for non-discretionary staples such as gas, groceries and household bills with their credit cards, Visa has been able reap the benefits. Throw in the steady growth in online shopping, which almost always requires a card, and you've got the makings of a winning stock.

Unlike the lenders that issue the cards, Visa is well insulated from credit problems because they don't carry any consumer debt on their books. Visa posted revenue of $5.2 billion last year as it handled more than more than 44 billion transactions (far ahead of rival MasterCard). For the Q1 2008 Visa grew earnings by 70% compared to the previous year and management anticipates year-over-year earnings growth of at least 20 percent for the next two years. I'll be interested to see what valuation the market is going to give this stock once more data is made public. I'm guessing the P/E ratio will be fairly steep due to the hype surrounding the IPO and this business model in general.

As a side note, this IPO is also extremely bullish for the investment banks that brought Visa public. The team, lead by JP Morgan (JPM) and Goldman Sachs & Co. (GS), is expected to collect more than $500 million in fees from the IPO. JP Morgan is a double winner as Visa's biggest customer and shareholder. Look for both of these investment firms to generate huge payoffs from this massive deal.

Disclosure: None

Comments

[Vegasjoe:]

If you have a 3 year or longer horizon, this is a great entry point! It will trade at $200 in 3 years or less. If you are a trader, you will see choppy waters short term; after all, all the banks in deep capital need will sell to raise capital.

2008 Mar 24 08:29 AM

[coeus89:]

i agree with Vegasjoe. i am 18 and bought about 1200 dollars worth at 59.5 and i think by the end of the year this stock will hav a fair value of $80. with VERY little risk and a lot of upside earnings growth and the possibility that down the road visa europe will join the company there is too much upside to be had not to get in now

2008 Mar 24 09:42 AM

[tj115:]

This is definitely a great stock to invest in... It might go up and down for a few days, but in the matter of a few months, maybe a few years, it will definitely be well over $200.00

2008 Mar 24 10:18 AM

[Bylo-:]

Yea, but what happens when the recession deepens and the economy slows down?

2008 Mar 24 11:44 AM

[User 167403:]

bylo-Typically, when the recession deepens you will actually see more people using their credit cards as they dont have cash readily available (which means more trans. fees for Visa). Considering they are mostly insulated from actual credit risk, the slowdown should not affect Visa too much.

2008 Mar 24 01:31 PM

[Yo from Madrid:]

My first purchase of stocks in my life done for 90 shares of Visa

2008 Mar 24 01:36 PM

[P/R CAL VEGAS:]

I WANT VISA STOCK TO GO LIKE MASTER CARD DID!!!!!!!!!!!

2008 Mar 24 02:01 PM

[Apex2:]

Even if that is true, the sheer volume of transactions globally will keep Visa into great profit returns. How many more billions of people in Asia can they get as customers? You can say a billion+. They've made so much from the IPO they pay all the lawsuits now. And how much money for building capital in those countries? Expense costs are low.

2008 Mar 24 04:53 PM

[Wez:]

Wow, way to many bulls in here to touch this thing.

2008 Mar 24 05:21 PM

[Qman:]

If there was a stock to get in the ground floor, this is it! Credit card usuage will do nothing but grow over time. If Visa can't capitalize on this opportunity, I give up on the stock market...

2008 Mar 24 08:59 PM

[Anthony5000:]

Hey guys don't forget about the Millions of government checks that the government is going to send out. That is like several billion dollars. What do you think most people will do with it? Some will put in the bank and use there VISA debit cards to purchase things or some will pay off there debt to Visa. Either way Visa will totally cash in on the government's way to stimulate the economy. All I can say is give Visa time.

2008 Mar 24 10:33 PM

[sternsss:]

And with newer generations joining the ranks of society, more will apply for visa cards. The older generations are not so keen about using visa, but not for the new generations. Some use the card because of the points they can earn to change for free gifts. They still pay back the loan at the end of the month. So as we can see, its a win win situation! Huat Ahh!

2008 Mar 24 10:48 PM

[SUKITEZ:]

Visa will definetly go big-way stronger company than rival MA which did nothing but rise-All I can say is numbers dont lie

2008 Mar 25 02:39 AM

[jimmy46:]

I can't believe how many simple minded people think because MA went up so much that V will do the same.

LOOK AT THE NUMBERS PEOPLE.

MA has a market cap of 30 billion 7 times rev
V " " of 50 billion 8 times rev

The MA IPO was priced low and people got a one time windfall
V was priced high and they didn't leave any money on the table.

The fact that a share of MA is $228 and V is "only" $64 is meaningless.

2008 Mar 25 01:59 PM

[Maybeso:]

1. The IPO gives Visa huge capital to work with.
2. Their track record shows their ability to manage since 1958.
3. The up side looks far greater than the down side to me.

I want go crazy but will build a position to hold a few years, and then buy and trade some on the dips.

2008 Mar 25 07:23 PM

[Not Worth T...:]

Visa is passive income. The infrastructure is set up. It just waits for money to come in as each transaction is carried out automatically by banks. What business is better than businesses that earn passive income? Think of why so many people buy investment properties and have them rented out.

The fact that the company only has a few hundred employees and still manage to have this exceptionally huge world-wide market, gee, why own MA when V has the biggiest share? Always go with the leader.

Much like the case with YHOO and GOOG, why GOOG deserves a higher P/E than YHOO initially after IPO? Much as why V deserves a higher P/E than MA initially after IPO?

MA cannot touch V in the short term, in the middle term, and in the long term.

Buy the market leader. Buy the world-wide leader. Buy the passive business model. Buy the no credit risk model. Buy the high revenue, low maintenance and employees model. Buy the star IPO status (one of the world's three biggest IPO ever!!).

We are so lucky to have V go IPO during this bad market sentiment. If it was IPOed the same time as MA was, V could have seen $90 the first trading day.

This is totally not worth any extra doubt. Just hop in the train and enjoy the ride like I did with GOOG when everyone bashed about its P/E vs. Yahoo's during Google's ipo.

2008 May 04 01:43 AM