4 Reasons Why the Visa IPO Excites

I've received a lot of email asking whether the Visa (V) IPO is worth buying. I wrote the following article for The Kelly Letter and sent it to subscribers on Saturday, March 1.

Visa will IPO around March 19 or 20 under the proposed symbol V for between $37 and $42. The company stands to make nearly $19 billion on more than 400 million shares, which would be the biggest U.S. IPO ever.

Should we buy? Let's take a look.

MasterCard (MA) went public two years ago. Since closing at $46 on its first day of trading, it's gained more than 300%. Its earnings growth is forecasted at 20% annually for the next several years.

In 2006, MasterCard processed 23 billion transactions adding up to $1.9 trillion in spending.

How does Visa compare? Impressively. In 2006, it processed 44 billion transactions adding up to $3.2 trillion.

I love the global transaction processing industry. Both MasterCard and Visa are smarter than American Express (AXP) and Discover (DFS). The latter two lend money to customers and customers pay them back over time at high interest rates. At first glance, it looks like a pretty good business.

Well, way back in 1603 Shakespeare pointed out in Hamlet that it's best to "neither a borrower nor a lender be." The sub-prime mess has confirmed that notion, and anybody lending to anybody is now having trouble. AmEx and Discover are both worried that cash-strapped consumers will default on their credit card payments.

Meanwhile, neither MasterCard nor Visa cares. The reason is that they don't lend any money. They only process the transaction and the customer borrows from the sponsoring bank. MasterCard and Visa just collect a fee every time somebody uses one of their cards to buy something.

Visa's only real competition is MasterCard, and it's already proven itself to be a bigger operation.

The future of credit card transactions is very bright, for four reasons:

First, developing countries still use mostly cash, and have yet to stumble upon the catastrophe, er, convenience that is credit cards. The sad truth is that most people just can't manage cards properly in their own favor, so they end up carrying balances at exorbitant interest rates. That's neither here nor there to MasterCard and Visa, though. They just process.

Second, the steady rise of the internet means more shopping will happen online. That will boost credit card usage as well but is not as much of a factor as developing country adoption rates. People already use credit cards when shopping in physical stores. There should be a little boost from online usage, though.

Third, people are using credit cards for smaller and smaller purchases, amounts around $5. Many stores don't even require a signature for purchases under $20 or $30. Customers find it convenient and processors love it because they get a fee. Only merchants dislike it because they have to pay a fee on each transaction. The customer usually wins out, though, and this trend toward plastic payment for everything will remain.

Fourth, economic weakness and what appears to be the steady de-sophistication of consumers all but guarantees a broader use of credit cards. People may skip their house payment, car payment, hospital payment and so on, but they still need to buy food and other items. If they're loath to shoplift, that leaves just credit cards as an option for the cash bereft.

I used to teach financial seminars in Los Angeles. I spent two hours explaining to people the right way to use credit cards so that there were no fees or interest rate charges, and then to put the joke on the financial companies by getting points or cash back for free. In follow-up surveys, I found that less than 5% of attendees ever got themselves on the right track. And those were people interested enough in their finances to attend a seminar!

So, the storm of profit from those with enough financial rope to hang themselves is blowing harder than ever, and Visa will cash in big.

As you can see, I'm interested in owning shares of Visa.

That being clear, I'm not going to rush to get it on the first day it goes public. We're in a rough market these days, and there will probably be plenty of time to pick up shares of Visa after its IPO.

MasterCard closed its first day of trading at $46, then closed five days later at $44. Three weeks later, it spent a whole week at less than $46. Six weeks later, it spent two weeks at less than $46. See what I mean? There will probably be plenty of time to get Visa at a good price.

Also, MasterCard's success makes it less likely that we'll see as much of a run to the sky with Visa. MasterCard surprised with its strong business. Visa won't, precisely because everybody now knows what a great business credit card processing is.

I'll keep an eye on it.

Comments

[Wez:]

Do you have any idea what the market caps will be between the two?

2008 Mar 10 12:25 PM

[mslasky:]

With the prior example of Master Card's IPO, and it's outperformance to date, the VISA will not be so casually taken, and participating in the IPO (as I plan to do) is a good entry point.

2008 Mar 10 03:43 PM

[darwin666:]

Visa is selling half of its shares for 14 to 18 billion.
MA has a mkt cap of 25.11B in todays price..
Visa is supposedly. 1.5 times bigger than MA.. so now , to compare apples to apples, if visa open at 40 . and its mkt is 17billion and that is half of the Cos, is it comparable to MA.. ie. 34 billion and 25 bill for MA

by the way. the number I got for MA 25 billion is from the yahoo finanace website. is that the total mkt cap ?

finance.yahoo.com/q?s=...

2008 Mar 10 05:23 PM

[Wez:]

Just wondering if VISA is flooding the market with overpriced shares because of how well MA has done. I love the story, the internet is all credit card all day, and just charging a fee instead of loaning cash is nice from a cost standpoint. On the other side of the coin, how hard can it be to cut out a middle man charging a fee for little added value?

2008 Mar 10 07:41 PM

[daffy:]

"On the other side of the coin, how hard can it be to cut out a middle man charging a fee for little added value?"

I don't know wez, but if you and I come up with a marketable plan, then we could be paying ourselves millions each year in bonuses.

It is worth a shot isn't it?

2008 Mar 10 10:32 PM

[clear1:]

Great article. Clearly, the investment bankers misjudged the valuation investors were willings to pay for Mastercard...they won't do that this time around so we do not expect great performance for public shareholders who buy at the opening. It will be interesting to see how the market reacts regarding this much anticipated IPO in this poor market environment. We agree with many of the previous comments, no need to rush into this one.

2008 Mar 11 08:09 AM

[Wez:]

What is it that MA or Visa actually own that makes them irreplaceable? Do they own the little card readers that transmit the card information to the banks? Do they provide the call centers to handle the call traffic when something goes wrong? If they're just earning a fee off each transaction, what makes them mandatory in the grand scheme of things?

2008 Mar 11 06:24 PM

[pingu:]

As compared with mastercard, Visa (visa-europe is not included in the ipo deal) is deriving more of its transactions from US. Expect for growth from micropayments its growth potential from EU and Emerging markets is less than MCs.

2008 Mar 11 10:44 PM

[eviltwin:]

Do you have any word on how oversubscribed this offering is? I have been offered an allocation and am a little concerned about the size of the offering and that the offering is coming at a 30 P/E versus MC's 11 P/E when it went public. If there's going to be a pop, I'd be all in and possibly sell the first day but I'm worried this will be one of those bloated pigs that falls from the opening bell and the people who bought at the IPO price turn out to be unwitting bagholders.

2008 Mar 12 12:14 PM

[eviltwin:]

Do you have any word on how oversubscribed this offering is? I have been offered an allocation and am a little concerned about the size of the offering and that the offering is coming at a 30 P/E versus MC's 11 P/E when it went public. If there's going to be a pop, I'd be all in and possibly sell the first day but I'm worried this will be one of those bloated pigs that falls from the opening bell and the people who bought at the IPO price turn out to be unwitting bagholders. Thoughts?

2008 Mar 12 12:14 PM

[rtf:]

interesting comment eviltwin? I didn't know that allocations had been offered yet? I'm a schwab account holder and you can't even put in an expression of interest until the 17th & 18th. What I've gleaned so far is that from reading other articles, and posts is that the offer price is $39.50 and it will probably not be over subscribed based on the size of the offering, but I'm just piecing that together from articles such as this:

biz.yahoo.com/ibd/0803...

Thoughts?

2008 Mar 12 09:43 PM

[ozcutty:]

I heard it was going to market at a p/e of about 20x which is better than MA currently trading at 25x earnings.
The difference with the MA IPO was it was a lot smaller and supply/demand kicked the shares upwards.
With such a big ipo in a bearish market, it will take a while to absorb all these shares. Still people look at the performance of MA and in this dodgey market, they will rush to anything that looks remotely profitable

2008 Mar 12 10:14 PM

[investmentA...:]

Visa IPO $44 vs Mastercard IPO $39 ( Performance Analysis )
investmentaction.blogs...

[Visa IPO]
Current Price (4/30/08) $83.45
First Day Close $56.68
Return from IPO 89.7% in less than 2 months!

IPO Profile
IPO Date 3/18/08
Offer Price $44.00
Offer Shares 406.0 mm

[MasterCard IPO]
Current Price (4/30/08) $278.16
First Day Close $46.00
Return from IPO 613.2% in less than 2 years!

IPO Profile
IPO Date 5/24/06
Offer Price $39.00
Offer Shares 61.5 mm

2008 May 01 12:43 AM