What Visa's IPO Means for This Market

Amid all the wailing and gnashing of teeth, we had a successful IPO: Visa (V) went public this week and made history.

Not only was it a resounding success for the investment bankers in a very difficult time, it was also the biggest IPO ever at $18 billion. And it managed to jump +30% from its $44 per share pricing.

But perhaps it was because of the financial and credit market turmoil that Visa did so well. Unlike many financial companies it carries no consumer debt but instead relies on small commissions on transactions.

Leadership
Each bull market has its leaders. A few years ago, Google (GOOG) and Baidu (BIDU) debuted on the stock exchange and quickly became the darling of momentum investors. Now they both lie broken, not only below their long term moving averages but also with the sword of Democles” (overhead resistance) hanging persistently above price.

So, if we are in the painful process of putting in another bottom here, as I’ve endlessly argued for the past little while, it is wise to look for the next leadership that will breath new life into the “new” bull market.

If Visa does as well as its competitor, MasterCard (MA), I’ll be a happy camper.

IPO Market? What IPO Market?
So far this year, we’ve had only 22 IPOS. Last year, by this time, we had 47. That is a greater than 50% drop off in activity.

If you’ll recall, the IPO market has predictive abilities.

The other way that the IPO market can help us time the market, or at least understand where we are in terms of market cycles, is by being a contrarian indicator of sorts. A bountiful harvest of IPOs has almost always preceded dramatic and sustained market downturns while a barren IPO market has historically meant the oppsite.

Comments

[sliman]

Any thoughts on what V is presently worth. I believe Morningstar has a $72. value on V.

[E.F. NUTTEN]

What's "V" worth? Pull up a chart on Mastercard (MA). Look at what it's done since it IPO'd a couple of years ago. Visa has a 80% marketshare vs MA's 20%. If that's not a snapshot into the future, I don't know what is. Buy as much "V" as you can get at these prices. Sure, it might fluctuate five to ten dollars, up and down, as all stocks do, so save some cash and be ready to dive in when that happens. Just don't miss the train altogether.
- The Nutten Man

[SergeyMaskalik]

I just wanted to give you my contrarian’s 2c. I believe Visa previous owners are trying to get out from the credit crisis by doing this IPO; I think this is the last great opportunity for them to exit. And if you really think do you think American's are going to be using credit cards more or less? I think most of them are already deeply in debt and we don't have a housing bubble anymore to support extreme shopping. I think the number of transaction is going to decline as we enter harder times... and don't look at master card as an example, because it did well during different times. Right now we are in much worse situation.

[Martin21]

V P/E is similar to MA, so market share does not matter because it is already reflected in multiple. Consumers might use their credit card more as it is the only available credit they still have, but with the interest rates credit cards charge, consumers will have to eventually cut back. I can see V going up for a little while but I am waiting on the sideline looking for the euphoria to pass before going short

[Philly Jim]

Sergey... Americans? There are a few billions credit card users out there in the WORLD. Last time I was at the store, I saw people using credit cards for packs of gum and bottles of water!! Now that gas is becoming very expensive, more people are taking out the plastic to pay for that. I would think as people become more cash strapped, they will use their bank issued credit cards for just about everything.

[GKM]

Let's see: the smartest guys in the room (currently JPM) are releasing their interest in V to the market. If good times are just around the corner, why didn't they hold out for them and a higher IPO price? Why would insiders who know the true value of something be releasing a great company like V into the market at what could possibly be the bottom?

Hmmm, how about this? Revenue for V is about to fall dramatically as the largest consumer economy in the world goes through retraction. How many purchases by other emerging markets will be required to make up for this retraction even if V does continue to drive growth outside its pre-existing markets? Will V really be able to pass along the same transaction fees into places like China?

How's that Blackstone IPO treating those who rushed to get into the greatest opportunity of its day? The truly smart guys who are divesting a "great" and established business never sell because they are hoping to make a bunch of money for the public.

[mjn185]

Lets look at these comments for the very answer that we are all searching for. Why did JPM release the shares to the public market. Hummmmm lets see. Oh wait a minute I know the answer. How about that is what they are supposed to do during a companies IPO. How about all of those comments on retraction of the economy. Well there are but that does not stop people from spending money on necessities and the ability to defer those costs in the hopes of better times ahead are what drives most people to have credit card debt. With that said though the fact is that we are moving quickly towards a cashless society. Debit cards are now used for the majority of purchases made on a daily basis and the last time I checked those debit cards have a big Visa or Mastercard stamp on them. Also with the international exposure of these businesses they will reap the benefits of other nations not dealing with a housing crisis purchases. I love when people make decisions based off of gut feelings or bad info. It allows others time to get in at a price point they like. If you are so bearish on Visa then please short it with all that you have because I look forward to shorts rushing to cover. To your point GKM about Blackstone. These are two completely different businesses with different models. You might as well be comparing Toyota to Apple or Altria to Sirius.

[magnificient98]

I just wanted to point out that JPM and all the other banks only sold a 1/3 of thier holdings to the public in this IPO. Also note that all the underwriters excercised thier right to purchase 40 million shares @ $44 on the second day of the IPO. it's up to you to interpret what all this means.

[leh]

IMO V is a big cap blue chip momentum safety play that the public will chase a long way higher as the story unfolds and more joe blows discover the company has no debt exposure. From a psychological standpoint, what can be better than an oceanliner floating confidently above the tumultuous sea where many financials are drowning?

I would also add that V is considered THE 800-lb gorilla within the Wall Street IPO community itself. One hedge fund manager I know who specializes in IPO's has been high on this release for months, and indicated it is seen as an extremely hot issue by insiders.

[Jack Yetiv]

Based on the above comments, it is clear that credit card transactions could either go up (because people are pinched for cash) or down (because people who feel poorer and are not refinancing their houses and taking cash out spend less).

Both of these thoughts are plausible, and I don't know which trend will win out. But there have been several surveys asking American's what they will do with their upcoming rebates, and many folks said they will pay down existing bills. It seems to me that the overall volume of purchase transactions in the US (and perhaps around the globe) will decrease (look at guidance from many companies, with Walmart and Costco being notable exceptions).

It seems to me that the question is, As total purchase transactions go down (or even stay level), will a greater proportion of them be transacted on credit cards?

I could make a good argument in either direction, so I won't make a call here, but I do note that several million Americans will either default on their credit cards and/or go through foreclosure and /or bankruptcy in the next year, and their ability to make credit card purchases will either decrease a lot or vanish. Additional millions of Americans will hit their credit limits (which are unlikely to get increased in the current environment) and they will also be constrained from making many credit card purchases.

Therefore, while many Americans might WANT to make more credit transactions, and some of them will (those with available credit and who can continue to meet their monthly payment obligations), many who want to do so won't be ABLE to.

It seems to me that this is a very hard call, and that although V is not DIRECTLY exposed to credit risk on the cards, credit events may well influence the number and amount of transactions on people's Visa cards.

Jack Yetiv

[GKM]

A company has no legal or moral (or whatever) obligation to sell its shares. There are two reasons to do an IPO. One is to get financing and the second is to lock in gains. If V is such a great business given how long it has been around and given its incredible? growth prospects, why does it need financing? Is it something more systemic that is wrong and is therefore causes JPM to seek cash at low valuations (not exactly a bullish statement)?

That brings us to the second reason. Come on. Do you honestly believe that JPM is saying 'yes we are so incredibly philanthropic/moronic that we want to give money to the public'? In that case if I were a JPM shareholder, I would be filing suit on Monday for breach of trust. I would say hey what are you doing making the public 48% richer than you made me? And to that some smart JPM exec would say to me in a hushed tone 'don't worry we sold it for all it was worth'. I have to oppose the supposition that JPM execs are morons. Morningstar must believe they are for giving away a $72 stock for $44.

Personally I hope all here have been long V from the get go and that we can sell V together and make a bunch of money (you locking in gains and me counting on some). The only one that doesn't want that to happen is Mr. Market because he plans to keep the money for himself.

[texasgolfer]

V and MA get paid per swipe by the vendor not vendee. As emerging markets populations earn more they will also learn to swipe. Credit card training now begins in college years (and has for over 30 years) and transaction simplicity exceeds that of check or credit when items are faulty or returns are necessary. If you eliminate the deadbeats you still have a very large percentage of the population using credit responsibility and will continue to do so. Hey, if I don't buy at JWN, I can charge at WMT and V still gets the fee. Now add in the increasing uses of debit cards and the market would seem to have a continued potential to expand, until they put a chip under my finger to swipe at checkout. When Iran explodes its first nuke, I will consider selling.

[cpeterka]

Remember how great BX was? They grabbed our money and ran.
Now, with the Credit Crisis approaching, and soon people will start filing for bankruptcy, just like the foreclosures for the homes, next up is the credit cards that are over extended. It's all down hill from here on out.
. I may buy in about 3 years when it comes down to half or less of the IPO price.
Good Luck, I'm a pessimist on this one.

[tj115]

Visa is definitely going to shoot up, over $100.00 because the market has very little effects on them. All of you are complaining about our economy... This is definitely a long term stock and I am sure we will see up and down days but in the long run, when our economy recovers, and always will, it will be an amazing return rate.

[scottitheduck]

Here's me. 28 years old, college grad, small biz owner. Since I was 18 I have had a DEBIT card. I have NO DEBT but swipe my card 90% of the time for a few reasons....

1) I know how to balance my account. Not once have I had an overdraft fee. Using my Visa Debit SAVES me money as opposed to cash because I don't have 18 dollars change in my pocket after my pack of gum...

2) Checks? Are you kidding me! About as worthless as a fax machine In the aforementioned 10 years I have written at most 1 check per year. People I know will AVOID a bar, restaraunt or even a utility bill if they can't pay with a card.

3) Online management of my account and not having to wait for someone to cash a check and overdraw my checking account. Priceless.

4) I buy stuff online. Lots of stuff. The security and convenience it gives me through Pay Pal, Amazon etc sames me what I have little of.... TIME!

5) Airline Miles. Everything I have purchased for my company in the past year and a half has gone on my small biz Visa. I could care less about my rate, because as I mentioned earlier I know how to pay off my card.

Finally, as noted before VISA makes money every time someone runs the card. If you think for one minute that people my age and ten years younger use anything BUT a card you can forget it. Long-term growth story here. I plan on buying a house in a few years with the V I bough last week!

Aloha,

scottitheduck

[User 167022]

GKM,

No, of course JPM and the rest aren't deliberately giving the public a payday out of some philanthropic impulse. But then that's not a serious rejoinder to what anyone else has said, or any kind of evidence for us to consider as we try to judge Visa's value.

Sergey is, I think, half correct: Visa's owners are trying to use this IPO to raise cash. There's nothing sinister about that. And since most of them are keeping most of their shares, how down on Visa's prospects can they actually be?

But, as Philly Jim points out, Sergey is half incorrect: Visa, like so many other giant American companies, is rapidly expanding its global presence. When I got my Bank of China credit card last year, I was given the choice between Visa and Mastercard. None of the big US banks are directly making money on my local purchases, but Visa is. And there is still a LOT of room for growth in the Asian market-- and all the national economies around here are growing at 5% or more per year. Visa is rapidly expanding in countries with expanding middle classes and high personal savings levels.

[GKM]

User, you should really come up with a unique name since you are obviously a thoughtful person and it is always good to be able to recognize the comments of someone like that on here for more rapid filtering.

In fact my comment is a serious rejoinder, as you put it. Someone is wrong. Either JPM is wrong in its underpricing or the retail investors who ran into the stock this week are wrong in bidding it up. This is a zero sum game. Someone is always wrong. Which one is it?

If the owners need cash, what does that say about the economy? These are the guys that can get the cheapest rate going - the Fed funds rate. The little guy, i.e. the consumer, is also loaded up with debt but doesn't get the benefit of Fed funds rate. They pay whatever the banks need to charge to insure against defaults. You might have the best credit in the world but you still have to pay for every Tom, Dick, and Harry who goes bankrupt. It's like car insurance. You subsidize those with bad records because the insurer/bank has to make money off those they can count on.

Every single consumer is going to be hit by higher lending costs. That means less disposable dollars and a decreased sense of financial wellbeing. That means going to WMT once a week instead of going to T and HD and BBY at least once per week. Why do you think BBY is off 20% in 4 months? If their revenues are falling, then what does that say about the likelihood that V will be able to sustain its transactional revenues?

I absolutely agree that Asia will be a growth story for V. However, you are obviously familiar with the economic situation of that region. Do you honestly think that the average Chinese person with income of about $2000 dollars (2006 figure) will be racking up the same number of transactions at big box stores with debit machines at every till?

Some day growth there will be phenomenal but whether it will be captured by V or some other entity remains to be seen. I prefer to place my bets when and where there is a higher probability of success. If you want to look into the future of how V will play out, take a look at the chart of VMW (or for that matter pretty much any IPO of 2007). But V is totally different right? Right........

[wadebloggs]

I don't see what's so sinister about JPM, et al cashing out some of their V shares. The banks are writing down $billions in CDOs etc all the time, so why wouldn't they take an easy step to raise cash to shore up their balance sheets? In that sense, it's not like Blackstone who shrewdly sold at the top of the market just because they could.
As for the recession, we probably are in one, but who can see the present much less the future? I believe V is pretty well-insulated on the downside because people are swiping more for everyday things. I would also think that the buy ratings from research firms should come in a few weeks which could be another catalyst. Tough barriers to entry for competitors since member banks own V and wouldn't want to compete against themselves.
The biggest risk is legal awards against V. Frankly, I am not sure how to assess that. I do know that if case against V ultimately makes it to SCOTUS, they'll win as this is the most pro-business bench ever (see last weeks NYT Mag cover story).