Here’s why Visa stock is plummeting this week

Key points

• Visa got hit with an antitrust lawsuit by the DOJ this week.

• The news sent the stock price down about 7%.

• What should investors make of this development?

The credit card giant was hit with a lawsuit by the DOJ.

Payment and credit processor Visa (NYSE: V) saw its stock price plummet about 7% this week, with the primary catalyst stemming from a legal entanglement.

Specifically, the credit card giant was hit with a civil antitrust lawsuit Tuesday by the U.S. Justice Department for monopolization and other Sherman Antitrust Act violations in he U.S. debit markets.

It is the latest federal challenge to Visa’s dominance in the payment processing space. Currently, there is a bill in Congress, the Credit Card Competition Act, that would require banks to offer at least two networks to merchants for processing credit card transactions — and only one can be Visa or Mastercard, which are the dominant players.

The bill is currently stalled in Congress, but like the Justice Department lawsuit, it seeks to bring more competition into the payment processing space.

Visa stock has dropped about 7% since the suit was filed on Tuesday. As for its competitors, Mastercard (NYSE:MA) stock dropped about 2%, while American Express (NYSE:AXP) jumped 1.5% and Discover Financial (NYSE:DFS) rose 3%.  

Justice department alleges anti-competitive practices

Visa is the dominant player in its industry, processing about 60% of debit transactions in the U.S. Along with Mastercard, the two companies own about 86% of the market share, followed by American Express at 11% and Discover Financial at around 2%.

The Justice Department complaint alleges that Visa “illegally maintains a monopoly over debit network markets by using its dominance to thwart the growth of its existing competitors and prevent others from developing new and innovative alternatives.”

One of the ways it does this, according to the complaint, is by imposing exclusionary agreements on merchants and banks that penalize Visa’s customers who use a different debit network or alternative payment system.

This has the effect, the complaint alleges, of insulating Visa from competition and smothering smaller, lower-priced competitors. The Justice Department said Visa charges more than $7 billion in fees each year for processing those transactions

“We allege that Visa has unlawfully amassed the power to extract fees that far exceed what it could charge in a competitive market,” U.S. Attorney General Merrick Garland said in the release. “Merchants and banks pass along those costs to consumers, either by raising prices or reducing quality or service.  As a result, Visa’s unlawful conduct affects not just the price of one thing – but the price of nearly everything.”

Visa officials called the suit “meritless.”

“Anyone who has bought something online, or checked out at a store, knows there is an ever-expanding universe of companies offering new ways to pay for goods and services,” Julie Rottenberg, Visa’s general counsel, said in a statement. “Today’s lawsuit ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving. We are proud of the payments network we have built, the innovation we advance and the economic opportunity we enable. This lawsuit is meritless, and we will defend ourselves vigorously.”

What does it mean for Visa stock?

Visa has been one of the best, most consistent stocks on the market for decades, due to its market strength and leadership, its simple, low overhead business model, and the ongoing resilience of the American consumer.

Year to date, the stock is up about 4%, but over the last 10 years it has posted an average annualized return of 17.5%. It has been fairly steady and stable through economic ups and downs, with its only down year since 2010 coming in 2022 when the stock was only down 3% in a year when the S&P 500 fell 19%.

While the suit caused this week’s selloff, some Wall Street analysts don’t think it will have a significant long-term impact on Visa’s standing or financials. KBW analyst Sanjay Sahrani said, according to Reuters, that U.S. debit revenue only represents about 10% of Visa’s overall revenue.

“U.S. consumer payments business is the slowest growing piece of the aggregate business, and to the extent its contribution is affected, it is likely to have a very limited impact on revenue growth,” he wrote of Visa in a research note, reported Reuters.

He and other analysts added that the suit, if it’s not settled, will likely drag out for years in appeals, limiting any immediate impact.

In fact, Morgan Stanley analyst James Faucette sees this week’s selloff as a buying opportunity. He maintained his buy rating and $322 price target, which would represent 20% upside.

While this lawsuit, as well as the bill making its way through Congress, bear watching, I’d agree that it shouldn’t have any major near-term impact on Visa. Visa has long been one of the best stocks on the market and at a reasonable valuation, it still looks like a solid buy. But it is something to monitor in the months and years ahead.