Is Visa a Great Hedge Against Inflation?

inflation is picking up. However, commodity stocks, such as oil producers and gold miners tend to do well during rising inflation. In addition, stock multiples tend to decline among high-growth stocks, particularly in times when the yield curve flattens and discount rates rise.

Commodity stocks and other market hedges are one thing. However, looking at growth stocks, it’s really hard to find inflation-resistant stocks to load up on right now. Most growth stocks are being impacted by the same factors, selling off almost in unison.

However, my bullish view on Visa (V) is that this payments company actually does hold some inflation-resistant properties. Given the fact that Visa’s revenues are directly tied to both transaction volumes, and transaction size, rising costs could be a broadly bullish factor for this company’s top- and bottom-line growth.

For Visa, this could mean that the small percentage this company earns as transaction fees will grow alongside inflation.

Impressive Valuation

This inflation-protected business model is one many investors think warrants a higher valuation for Visa than many of its growth peers. That view certainly seems to be logical, in light of the margin pressures inflation has for most producers (rising input costs squeeze margins if companies aren’t able to pass these increased costs on).

For Visa, the company’s business model is very capital-light. This company earns very high margins which may actually grow in this inflationary environment. Accordingly, the company’s valuation is one that could be too low, relative to other fintech stocks out there right now.

Currently, Visa stock trades around 37x trailing earnings, a valuation multiple that’s certainly not considered cheap by most investors’ standards. That said, the company’s return on equity almost matches its price-earnings multiple, coming in at 36%, a great indicator of the company’s ability to create shareholder value over time.

Additionally, Visa’s balance sheet is strong, with the company’s debt almost entirely covered by its massive cash position of more than $15 billion.

Indeed, operating margins of 66% (Visa keeps two-thirds of the revenue it brings in) is incredible, particularly for this kind of mature company in the market.

Looking forward, it’s likely Visa will continue this trend. The company’s most recent earnings provided for strong forward guidance, along with excellent recent results.

Visa managed to bring in EPS of $1.81 per share, beating estimates handily, and also signaling 27% growth on a year-over-year basis. At a time when many other companies of this size are struggling to maintain growth, Visa is a company that appears to be on hyper-drive.

Visa’s growing share in the e-commerce space, and strong positioning in the physical retail market (which is coming back as pandemic restrictions continue to unwind) is extremely favorable for long-term investors concerned about the next few years. As far as solid long-term holdings go, Visa has to be up there with the best.

Wall Street’s Take

As per TipRanks’ analyst rating consensus, Visa is a Strong Buy. Out of 19 analyst ratings, there are 16 Buy recommendations and three Hold recommendations. 

The average Visa price target is $273.47. Analyst price targets range from a high of $312 per share to a low of $210 per share.

Bottom Line

Finding top growth stocks to buy that provide some level of protection to rising prices isn’t easy to do. Visa’s business model is unique, and while competitors do exist, Visa retains its market share lead among its peers in the credit card and payment processing space.

Sure, some investors may be concerned about the advent of crypto or other fintech companies looking to disrupt Visa’s lead. This company’s fee structure is one that has come under scrutiny before. It likely will continue to be tested over time.

That said, Visa is also a company with an impressive moat around its core business that’s hard to replicate. As more transactions roll in at higher prices, Visa stands to benefit. Even if consumer spending slows, if prices rise faster than slowing consumer spending, Visa comes out ahead.

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