Shares of Visa (NYSE:V) hit fresh 52-week highs on Friday as the stock surged above $238.
Year to date, the credit card company has risen a modest 9% in value thus far in 2021 while the S&P 500 is up more than 15%.
Investors who buy the stock today are paying some hefty multiples for Visa – 49 times its trailing earnings. That's a steep price tag for a company that isn't exactly a growth machine; its net income in fiscal 2019 and before the pandemic impacted its bottom line totaled $12 billion and grew by 17% from the previous year. While that's solid year-over-year growth, it may be hard to justify paying such a high multiple of earnings for a stock like that. Even on a forward P/E basis, the stock is still at a multiple of more than 40.
In its most recent quarter, the company's sales of $5.7 billion for the period ending March 31 were down 2% year over year as it continues to recover from the pandemic and a lack of travel and consumer spending. But the big risk ahead for the business is that as stimulus payments come to and end and things go back to normal, consumers may find themselves in tighter financial positions.
That can heighten the risk of default and also lead to disappointing economic numbers, which could make Visa look even more expensive if consumer spending isn't through the roof.
With too much optimism behind the stock right now, investors should be very careful with Visa. Although it's a good long-term buy, there could be some significant headwinds ahead that may push its share price down before the end of the year.
