Why Visa (V)'s Earnings Are A Good Reason To Buy Amazon (AMZN)

Amazon (Shutterstock photo)

Regular readers of my columns will be aware that I have been bullish on Visa (V) for a number of years. I saw it as a way to play the recovery in consumer spending, both here in the US and elsewhere, without venturing into the dangerous retail sector or picking favorites among online retailers with triple digit multiples.

So far, so good; Visa has consistently outperformed the S&P 500 over the last few years, and reported yet another solid beat of estimates this morning.

Visa is still one to hold, even though the glaring value that was evident in V a few years ago is no longer there, but the best trade in reaction to Visa’s earnings this quarter may be to buy Amazon (AMZN) in front of their earnings tomorrow.

 The link between the two is clear. Consumers cannot use cash for online purchases, so the vast majority of the nearly two trillion dollars of worldwide online sales are transacted using a debit or credit card. Visa dominates that market with over half of the world’s card transactions.

An increase in business for Visa therefore equates to an increase in e-commerce, unless brick and mortar retail has experienced a huge, trend-altering surge. That is, to say the least, unlikely. An increase in online transactions should benefit Amazon generally, but the details of Visa’s earnings suggest that it will do so disproportionately this time around.

Visa’s success over the last three months was achieved the old-fashioned way, by increased sales. That is nothing new, but in last quarter, the U.S. market was the main driver of that growth. That has not always been the case recently, as international markets have recovered from a period of relatively low economic growth. That matters to AMZN because, despite plans to expand internationally, the vast majority of the company’s revenue still comes from America.

It is easy when researching Amazon to forget that its core business is retail. Just this morning the announced a new security system to work with Alexa, and the array of products and services that have been rumored, planned and announced recently is dizzying.

We should not forget, however, that the bulk of the revenue that allows for that innovation and subsequent diversification comes from their core business, and improved results there matter.

Still, the focus of most people when Amazon reports tomorrow will be elsewhere. Prime membership, overseas expansion and, most importantly, the performance of Amazon Web Services (AWS) will probably grab most of the headlines. That is understandable as Prime and AWS in particular are ways of bringing much needed margin expansion to Amazon, and international expansion is necessary if growth is to continue.

But we should not forget that innovation and expansion have been funded by huge revenues from the company’s core business. Increased online retail activity matters.

It is always possible to make a case against buying AMZN, and those that make that case usually rely on P/Es measured in the hundreds. However, that has always been the case, and yet the stock has climbed 229% since the beginning of 2015, versus a 26% gain for the S&P 500.

Another, more persuasive argument would be that buying anything in front of earnings is to take an unnecessary risk, but there are mitigating circumstances here also.

Firstly, the innovation and diversification mentioned above make it extremely likely that Amazon will continue to grow in the long term, so any drop should earnings disappoint will be temporary. Secondly, the relative weakness of the stock over the last three months suggests that such a negative reaction would be limited. After low earnings on massive investment last quarter expectations are low anyway, so even what looks like a miss may well be more of a “told you so!” for many people that a prompt to sell aggressively.

Trading and investing is essentially about predicting the future, something which is inherently difficult. When we are given clear clues as to what is about to come, therefore, we should pay attention. Visa’s earnings are such a clue, and make buying AMZN in front of earnings a far less risky trade than it might otherwise appear.

Source: nasdaq