Overview

Visa operates as a payments technology company worldwide. The company facilitates digital payments among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. In addition, the company offers card products, platforms, and value-added services. The company has a robust business model with strong revenue streams and significant market presence.

As of this year, Visa has around 4.3 billion cards worldwide which sounds pretty crazy. This is a company that is made for value investing. Growth in revenue and free cash flow, stock buybacks and increasing dividends. Profit margins have been more than 50% for the last three years. At current valuation which is lower than historical buy, this seems to be a perfect opportunity to buy. However, we need to take a closer look to decide what is best for value investors.

Business Assessment

Visa has a highly scalable and profitable business model centered around transaction and data processing and international transactions. The company benefits from a competitive advantage due to its extensive global network, brand recognition, and technological infrastructure. The company also has significant growth potential driven by expanding digital economies, increased e-commerce, and financial inclusion initiatives in emerging markets.

Strengths

• Strong market position and brand recognition
• Extensive global network and technological infrastructure
• High scalability and profitability
• Sustainable business model with increasing digital payment trends
• Significant growth potential in emerging markets and e-commerce

Concerns

• Regulatory scrutiny and compliance costs
• Cybersecurity threats and data breaches
• Intense competition from fintech companies and other payment processors
• Dependence on global economic conditions and consumer spending
• Potential impact of geopolitical tensions on international transactions

Growth Hypothesis

Visa is well-positioned for long-term growth due to several factors. The global shift towards digital payments and the decline of cash transactions provide a significant tailwind. Additionally, the continuous investment in technology and innovation, such as contactless payments and blockchain can drive future growth. The forecasted revenue growth of 11.28% per year and EPS growth of 18.13% per year indicate strong financial health and potential for sustained growth.

The company is planning on expanding digitizing cash and check transactions as well as e-commerce capabilities. Visa presents a strong position in co-brand partnerships and fintech collaborations. To increase its market share, the company will try to convert domestic network cards to Visa credentials with expansion in new markets such as government payments and open banking.

Decline Hypothesis

Despite its strong market position, Visa could face challenges that may hinder its long-term growth. Increased competition from fintech companies and alternative payment methods, such as cryptocurrencies, could erode its market share. Macroeconomic conditions, particularly in Asia-Pacific can add uncertainty to the future market position.

One of the main worries of value investors are the current regulatory challenges such as the recent US merchant settlement. Additionally, any failure to innovate or adapt to changing market trends could result in a decline of the competitive advantage.

Financial Strength

Overall, Visa shows a strong financial strength with a score of 4.15 out of 5. The company demonstrates strong liquidity with a current ratio of 1.4 and a quick ratio of 1.11. These values are slightly below the historical mean but still indicate a healthy ability to cover short-term liabilities. Despite slight declines in liquidity ratios, the company’s financial metrics remain strong and indicate a well-managed financial position.

The company maintains a conservative leverage position with a debt-to-equity ratio of 0.51, which is below the historical mean of 0.55. Historically, the debt-to-equity ratio has been stable, and the interest coverage ratio has shown significant improvement.

Strong Investment Case

Visa, with its market cap of $552 billion, is one of the world’s most valuable companies, boasting a remarkable 420% share price increase over the past decade. For value investors considering whether now is a good time to buy, the strong fundamentals and growth prospects offer compelling reasons to invest.

1. Steady Growth

Visa has shown impressive revenue growth, averaging a 9.9% compound annual rate over the past five years. Despite a dip in fiscal 2020 due to the pandemic, the revenue has been consistently rising. The company benefits from broad economic trends, including increasing global consumer spending and the shift from cash to digital payments. Handling $14.8 trillion in payment volume in fiscal 2023, Visa is well-positioned to capitalize on the move towards electronic transactions.

2. Tremendous Profitability

Visa is highly profitable, with an average operating margin of 65.9% over the past decade. This profitability stems from the scaled business model, where existing technological infrastructure ensures high margins for each transaction. Minimal capital expenditures lead to substantial free cash flow which is used to pay dividends and repurchase shares, further benefiting shareholders. We have already talked about the importance of growing free cash flow per share in our recent post.

3. Wide Moat

The company’s success is underpinned by a wide economic moat, protecting it from competition. With 4.3 billion active cards accepted at over 130 million merchant locations, Visa’s network effects create significant barriers for new entrants. Despite the rise of fintech competitors, Visa continues to grow its revenue and earnings, demonstrating its strong market position.

4. Valuation Considerations

Visa’s shares trade at a price-to-earnings ratio of around 29, which may seem high compared to the overall S&P 500. However, this valuation is lower than Visa’s trailing five- and ten-year averages. Given robust growth prospects, exceptional profitability, and strong industry position, the premium valuation is justified.

Latest Earnings Call Insights

Visa reported strong financial performance in Q2 2024, with net revenue of $8.8 billion (up 10% YoY), EPS up 12%. Key business drivers showed stability, with overall payments volume growing 8% YoY.

Management provided optimistic guidance for the future, emphasizing growth in consumer payments, new flows, and value-added services. They also highlighted significant opportunities in digitizing cash and check transactions, expanding e-commerce, and leveraging new technologies.

Some of the key points and numbers from the call:

• International payments volume: up 11% YoY.
• Q2 stock buyback: approximately $2.7 billion.
• Dividends distributed: over $1 billion.
• Leveraging new technologies like tokenization and AI-based fraud detection.
• Continued investment in technology and innovation to mitigate risks.

Why The Price Is Down?

Visa and Mastercard are set to face a new series of lawsuits over fees charged to retailers after a London tribunal allowed collective cases brought on behalf of merchants to proceed. These lawsuits add to the existing legal challenges the companies face in London regarding multilateral interchange fees, which retailers incur when consumers use cards for purchases.

Hundreds of claimants are suing Visa and Mastercard at the Competition Appeal Tribunal, which is managing the combined cases. In 2022, Commercial and Interregional Card Claims filed additional lawsuits seeking damages for merchants allegedly overcharged by the payment processors. Initially, the tribunal refused to certify these cases under the UK’s collective proceedings regime, akin to class actions in the US. However, it has now ruled that the cases can move forward, pending any objections from interested parties.

To settle the new and previous lawsuits, Visa will have to pay a sum of around 30 billion dollars which is a lot even for this financial mammoth. This can negatively impact the current financial situation and developments of the company.

Conclusion

For investors seeking a high-quality business with steady growth, tremendous profitability, and a strong competitive position, Visa remains an attractive investment. The company has a history of delivering on every earnings report and recover from short term factors.

I think the stock will definitely rise up again and finish the second half of the year on a high. This is a perfect time to buy shares as we are looking for Visa to hit its all-time high of around $290/share by the end of this year.

For the full analysis of $V visit ValueHunter