Visa is undervalued considering its consistent growth, says Mike Khouw. How to trade it

You likely have a Visa card in your wallet. As a global leader in digital payments, Visa has 4.2 billion credit and payment cards in circulation across more than 200 countries. It plays a crucial role in international commerce, enabling the movement of money across a vast network of consumers, merchants, financial institutions, businesses, partners, and government entities. Through its advanced transaction processing network, VisaNet, the company facilitates payment authorization, clearing, and settlement, and it is one of the most remarkable and consistent growth stories around — along with fellow payment processing company Mastercard. We’ll describe an upside call spread to bet on the stock’s continued success. The following chart illustrates its remarkably consistent growth since the pandemic plunge (which naturally suspended considerable economic activity). Interestingly, in the past two years, as multiples expanded in many stocks — and the market more generally— Visa’s stock price appreciation has resulted exclusively from growth. The stock’s P/E ratio has essentially remained unchanged since mid-2022 and is well below the 5-year average, as the chart below illustrates. While a 30 P/E is higher than the market’s, the S & P trades closer to 26 times earnings; Visa should trade at a premium. Earnings growth is roughly double that of the market more broadly. V 5Y mountain Visa, 5 years The question is, why did Visa’s multiples stagnate while those for virtually everything else expanded? What risks are investors pricing in? One is probably tied to risks associated with overburdened consumers. Lots of signs have indicated that consumers, mainly middle and lower-income consumers, are struggling. Rising debt levels, rising delinquencies, and management comments about consumer behavior among more price-conscious consumers confirm what anyone who has gone shopping over the last couple years. Many consumers are stretched. The ability for consumer spending growth to continue apace is limited, so presumably, topline growth will slow somewhat. There’s another issue, though, law enforcement. The Feds have been pursuing many of the most well-known companies, and last month, the DOJ sued Visa , alleging the company illegally monopolized the consumer payments market. Visa joins an illustrious crowd of government targets — the DOJ is currently investigating Alphabet, Apple, Live Nation, Nvidia, United Health, Southwest Airlines, and Regeneron, among others. From an investor’s point of view, it might almost look like a badge of honor. Corporate success makes a government target. It’s worth noting, though, that Visa occupies a dominant position within the payments space, and any threat to that dominance, whether from a competitor or the government, should not be ignored. The company reports earnings at the end of the month; the all-time high is $293. One way to play a breakout to new all-time highs while committing slightly less capital than purchasing the shares would require is with an upside call spread. For example , the November 29th, month-ending $290/$310 call spread cost $5.70 as of today’s close, risking 2% of the closing share price to make a bullish bet that the stock could rally to a new high over the next six weeks. Buy Nov. 29 $290 call Sell Nov. 29 $310 call DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.