Stablecoin Disruption: Time to Sell Your Visa Stock?

This week, stablecoin legislation was approved by the United States Senate. The bill -- called the GENIUS Act -- still needs to go through the other side of Congress and on to the President's desk, but it is one step closer to bringing stablecoins into the financial system. By regulating the new currencies pegged to the U.S. dollar, issuers of the coin will now need to keep ample reserves to pay back customers and also go through regular audits.

Investors are betting that legislation will spur customer adoption, which is a threat to Visa (NYSE: V). If stablecoins are adopted wholesale by consumers, it could mean less payment volume through Visa's network. Less volume means less profit.

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Does that mean it is time to sell your Visa stock? Not really. Here's why stablecoins are not a large threat to Visa's business model today.

New avenues for merchant acceptance

This legislation is inspiring companies to investigate making their own stablecoins. According to reports, both Walmart and Amazon -- the two largest retailers in the United States -- are exploring making stablecoins for shoppers. Retailers are incentivized to do this because of the high fees paid to the credit card networks every year, which range from 2% to 3% of every transaction. Visa only collects 0.1% or a little more of every dollar spent, while most goes to the banking partners that issue credit cards and give consumers cash-back rewards.

By adopting stablecoins, merchants see an avenue to avoiding the credit card fees that are a huge expense on their operations. Wal-Mart and Amazon alone could save billions of dollars a year that are now going to the financial system. It only needs to see mass adoption of stablecoins for this to happen. Easier said than done, but there are a lot of profits on the line for trying.

Image source: Getty Images.

The big hurdle: replicating the card rewards and scale

Defeating Visa and credit card fees is not going to be easy. If it were, the companies would simply stop accepting Visa altogether. But they cannot, because of Visa's immense scale in merchant acceptance and consumer usage that is difficult to replicate.

Visa has operations in 200 countries and territories, accepted by 150 million merchants and growing. It also has 4.8 billion total debit and credit cards in circulation. Over $15 trillion in total payments volume is processed by Visa every year. For stablecoins to succeed, they will need to replicate not one but both sides of this network. Shoppers will not use stablecoins for everyday use unless they are accepted everywhere. Merchants will not care about accepting stablecoins if nobody uses them.

Call me skeptical that they will reach Visa's scale anytime soon. This is a classic example of a network effect competitive advantage, which reinforces Visa's growing dominance in the industry.

Plus, we shouldn't forget about the thing consumers love about credit cards: cash back and reward points. Credit cards are able to offer so many perks to customers because of the 2% to 3% fees charged to merchants. Without them, it is a much worse customer value proposition, another hurdle for stablecoin adoption.

V PE Ratio data by YCharts

Should you sell your Visa stock?

No, you should not sell your Visa stock just because iy is dipping on stablecoin news. It is clear that this company has a strong competitive advantage and massive scale that stablecoin issuers are nowhere close to matching. The legislation has not even been approved yet, so there is no reason to panic.

That does not mean the stock is necessarily a buy at these prices. Its earnings per share (EPS) grew 10% year over year last quarter, which is right around Visa's long-term growth. As such a large business already, it is not going to produce hypergrowth in the form of earnings, but steady durable growth over time. Today, the stock trades at a premium price-to-earnings ratio (P/E) of 34 even after this stock dip, making the stock expensive.

Don't rush out and sell your Visa stock. But don't think the stock is a home run buy just because it slipped 10%, either.

Should you invest $1,000 in Visa right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Visa, and Walmart. The Motley Fool has a disclosure policy.