Payment processing giant Visa (V -0.44%) is seemingly under siege by lawyers. The company faces a laundry list of litigation over the fees it charges merchants to process transactions and alleged practices Visa has used to keep out competitors. Lawsuits are almost always a headache because it's hard to tell when or how they might affect a company.
Why come after Visa? It's arguably among the world's best businesses. Visa's stock has trounced the broader stock market since its 2008 initial public offering (IPO). It seems that winning a lot can put a target on your back.
That said, the litigation is no joke. The potential outcomes range from multibillion-dollar settlements to new rules that could throttle Visa's existing business. Should investors stand by Visa, or do all these lawsuits make the stock too risky? Here is whether Visa is a buy, sell, or hold.
Eying up the potential litigation impact
Visa is the world's leading payment network, connecting customers' payment cards to their respective financial institutions. Merchants pay Visa fees on each transaction, generating billions of dollars in revenue for the company. Visa's enormous size and market share give it leverage over merchants, who have tried fighting back on how much Visa charges them.
The company is so dominant that it's facing a barrage of lawsuits over alleged anticompetitive practices.
Since 2005, Visa and its chief competitor, Mastercard, have been negotiating to settle litigation over their interchange fees (yes, the case is nearly 20 years old). Earlier this year, the two companies proposed an estimated $30 billion settlement but a federal judge rejected it in June.
Then, last month, the Department of Justice filed an antitrust lawsuit against Visa over its estimated 60% share of the U.S. debit market. If that wasn't enough, merchants filed a new class action lawsuit that essentially piggybacks on the Justice Department's complaints.
The common thread is that merchants and regulators believe Visa charges excessive fees and strong-arms merchants to keep out competition.
So, what it will take to resolve this could be pretty expensive. Visa (and Mastercard) tried buying their way out of the 2005 lawsuit, but that didn't work. Antitrust litigation can be unpredictable, but it seems merchants and regulators want to see rules put in place to take Visa's leverage away or at least to diminish it. At the very least, settlements will likely tally billions of dollars, though the payments may happen over a number of years. The goal isn't to bankrupt Visa (nobody wins in that scenario) but to extract a pound of flesh.
Litigation could weigh on the stock for some time
In a twisted view, Visa's ability to attract antitrust litigation essentially validates just how fantastic a business it is.
The question is, what will ultimately happen to Visa? The oldest lawsuit has been dragging on for almost two decades, and yet, Visa has traded at an average price-to-earnings (P/E) ratio of 34 during the past decade. That's probably because Visa should be able to handle whatever settlement obligations come its way. The company has generated almost $19 billion in free cash flow (what's left of cash flow after capital spending) during the past year alone.
However, antitrust litigation can have wide-ranging outcomes, including rules to create competition or even break up the company in extreme cases.
Given the uncertainty, the stock could trade at a discount until Visa and the Department of Justice resolve the antitrust lawsuit. Today, Visa trades at roughly 25 times its estimated 2024 earnings, dramatically cheaper than its long-term averages.
Visa: Buy, sell, or hold?
There's no denying that litigation is a risk factor when investing in Visa. Fortunately, Visa itself has known this for years. The company had plans for coping with litigation established before its 2008 IPO. I'm not going to pretend to be a lawyer, but it seems that only an extreme outcome, like a company break-up, would significantly affect Visa's core business.
Visa will probably pay a lot of money in multiple settlements, and it may agree to reduce or cap its fees to appease merchants. But at the end of the day, Visa is still a cash cow and a global force in the multitrillion-dollar payments industry. Even if the stock never returns to a higher valuation, analysts estimate Visa's earnings will grow 13% annually over the long term, meaning double-digit investment returns without factoring in the stock's 0.7% dividend.
Although the stock may be volatile amid litigation developments, long-term, buy-and-hold investors can scoop up a dominant company at a rare discount. That makes Visa a table-pounding buy today.
