Visa IPO Brings Value, For Now

Updated from 7:07 p.m. EDT

Visa starts trading Wednesday, and judging from the low valuation that underwriters accorded the stock as it heads out the gates, it's likely to find a grateful market awaiting it.

The credit-card titan priced its shares at $44 apiece late Tuesday in an offering that will raise $17.9 billion. There are several good reasons for investors to take to the stock -- which I outlined on Tuesday -- and now I'd like to flip things around and look at some potential concerns.

These aren't factors that will necessarily weigh down shares, but they're important for shareholders to keep in mind as they watch their investment:

1) Visa doesn't consider you a customer. If you have a Visa card and use it every day, you might be seduced into the invest-in-what-you-know mantra of yore.

Fee Fight May Trim Visa's IPO Gains

But Visa's primary customers are banks -- the banks that issue your credit and debit cards, and the banks that handle merchant transactions. You are simply a cardholder -- at best a customer of Visa's customers.

This matters because Visa is treating its primary customers very, very well. As Laurie Kulikowski pointed out, $10.2 billion of the company's IPO proceeds will go to redeem shares held by member banks such as JPMorgan , Bank of America (BAC Quote), Citigroup , and Wells Fargo . You cardholders get bubkes.

(Interestingly, Visa's underwriters include financial giants such as JPMorgan, Bank of America, Citigroup and Wells Fargo. Self-dealing, anyone?)

Those payments have been a powerful incentive for banks to keep Visa as a client. Once they're paid out, the incentive vanishes. That doesn't mean members will be jumping ship, but it does open up the possibility.

2) Legal issues aren't going away. Another $3 billion from the IPO money will be put in an escrow account to provide for legal settlements Visa will make to American Express, and possibly Discover. That's on top of the $2.7 billion in litigation provisions last year.

But Visa's prospectus warns that amount may not be enough. The so-called "retrospective responsibility plan" to shield new shareholders from legal-settlement costs "may not adequately insulate us from the impacts of settlements of, or judgments in, the Discover lawsuit." And it may not shield it from "other pending or future litigation."

Lawsuits are attracted to Visa. Over the past five years, Visa has paid out $4.3 billion in litigation provisions, or 28 cents on every dollar of revenue it's brought in.

Incidentally, between the $10.2 million in member redemptions and the $3 billion in legal money put in escrow, Visa will only have $4.7 billion in cash from the IPO. That's still quite a stockpile, but it's not as large as some investors might think from just reading the headlines.

3) The economic backlash. Visa has said the last two recessions haven't really slowed it down, and that its debit-card business has broadened its exposure to counter-cyclical purchasing.

True enough, but this recession could be much nastier than the last two. And unlike the previous recession earlier this decade, which hurt business spending but was supported by consumer spending, a recession this time around could hurt the consumers that Visa depends upon.

And let's say consumers rely more on credit cards as their other income resources dry up. That could lead to headlines about regular folks crushed by credit-card debt. Of course, Visa isn't really exposed to consumers who can't pay their credit bills. But it is exposed to a backlash that could lead in turn to new regulations protecting consumers.