We recently published a list of The 9 best financial services stocks to buy now. In this article, we take a look at how Visa Inc. (NYSE:V) compares to other stocks in the financial services sector.

Despite significant turbulence in financial markets in August, the global financing situation remains stable. Despite significant declines in equity and corporate bond markets, financing conditions have not tightened significantly, suggesting resilience in borrowing.

However, after a decline of almost 10%, the broad U.S. stock market is still 5% below its July peak. Similar declines have been seen in European stocks, although there has been some recovery there; the market of the 500 largest companies is up 3% since its August low.

Corporate bond markets have also been affected. Higher-rated corporate bonds have seen risk premiums rise, but not enough to significantly affect credit conditions. The current market volatility has not significantly affected corporate or household financing conditions, according to Chris Jeffrey of Legal & General Investment Management. This view is supported by a major global financial institution’s financial conditions index, which indicates that while conditions have tightened since mid-July, they are still historically loose and more accommodative than during much of last year.

Amid the financial turmoil, the financial services industry has faced challenges but has also shown resilience. The long-term outlook for the industry remains positive. As we mentioned in our article: “The 25 largest financial companies in the world“The financial services industry is expected to grow at a compound annual growth rate of 7.7% over the next few years, from $31,138.82 billion in 2023 to $33,539.52 billion in 2024.. In 2023, Western Europe had the largest share of the financial services market, with North America in second place. Financial services are being transformed by generative AI, offering opportunities for creativity and efficiency.

The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the right operating model. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 percent to 4.7 percent of industry revenue, primarily through increased productivity. A new study by MGI examined the use of Gen AI at 16 of the largest financial institutions in the U.S. and Europe, which collectively manage nearly $26 trillion in assets. According to the study, more than half of the organizations studied have adopted a more centrally controlled structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. In addition, according to EY, artificial intelligence is transforming financial markets by improving risk management and enhancing the customer experience due to its wide range of uses.

RSM US’s Financial Services Industry Outlook 2024 also notes that the financial services market is evolving rapidly, with a focus on responsible AI in insurance. Similar measures are also being taken by states. For example, insurance companies are required to California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violations result in heavy fines. Second, the number of customer-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges and broker-dealers. Finally, the actual exposure of financial institutions to CRE maturities is another trend in the financial services industry. Therefore, financial institutions analyzing CRE-related risks should conduct a thorough credit risk assessment.

Methodology:

We sifted through the holdings of financial services and financial media ETFs to create an initial list of 20 financial services stocks. Then we selected the 9 stocks with the highest upside potential. The stocks are sorted in ascending order of their upside potential.

Due to our methodology, we excluded some heavyweights in the financial services industry because they had a negative consensus on upside potential.

Why do we care about the stocks hedge funds invest in? The reason is simple: Our research shows that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (See more details here)

A closeup of a modern payment terminal with a stack of credit cards on the side.

Visa Inc. (NYSE:V)

Analysts’ upside potential: 16.81%

Visa Inc. (NYSE:V), the world’s largest payment processor, operates in a duopoly and has a cost advantage over its competitors due to the strength of its payment network, making the company extremely difficult to copy. In fact, Visa has partnerships with over 15,000 financial institutions worldwide and has issued over 3.8 billion Visa cards that are accepted in over 100 million retail outlets. Consequently, the company enjoys tremendous profitability.

Visa facilitates card transactions by acting as an intermediary between consumers, retailers and banks. The company receives a small share of the “swipe fee,” about 25 basis points, with the majority of the cost going to fund merchant rewards programs for customers.

It is important to note that Visa neither owns nor incurs debt through the use of its credit cards, so the company is not responsible for the $1.14 trillion in credit card debt held by consumers in the United States. This means that its profits and business strategy are generally risk-free because it does not rely on interest and principal payments for its revenue.

Despite economic concerns, Visa’s second-quarter 2024 performance beat Wall Street forecasts on solid consumer spending on restaurants and travel. The company’s shares rose 2.7% after the earnings announcement. Excluding transactions within Europe, Visa’s payment volume rose 8% year over year, indicating robust demand for international travel, particularly from the U.S. and Europe. However, travel in the Asia-Pacific region did not recover as quickly as expected. The expansion of e-commerce helped offset regional weakness.

Visa’s net revenue of $8.8 billion beat forecasts of $8.62 billion, and adjusted earnings per share of $2.51 beat estimates of $2.44. Analysts view the confirmation of Visa’s 2024 revenue and earnings forecasts as a good sign despite industry concerns.

Dan Dolev, senior analyst at Mizuho, ​​said:

“Many investors thought they would have to cut their forecast. The fact that they didn’t is positive for Visa,”

Aristotle Atlantic Focus Growth Strategy stated the following about Visa Inc. (NYSE:V) in its second quarter 2024 investor letter:

Analysts believe that the company’s recent $30 billion settlement with Mastercard to cap card fees will have no significant impact on financial performance.

25 analysts have collectively rated the stock as a “Buy.” The average price target suggests a potential gain of 16.81% from the current share price of $261.14.

Total V 1st place on our list of the best financial services stocks to buy. While we recognize V’s potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than V but trades at less than 5x earnings, read our report on the cheapest AI stock.

READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.

Disclosure: None. This article was originally published on Insider Monkey.