Visa: Strong Growth And Attractive Valuation

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About: Visa Inc. (V)
by: Discount Fountain
Summary

Visa continues to lead among its competitors in the credit card market.

Growth in the Payment Processing Solutions Market is expected to double by 2024.

While a larger proportion of Visa's transactions are credit-card based, the company has seen significant growth in the debit card market.

I take a bullish view on this company.

Investment Thesis: A strong exposure to the credit card market, growth in debit card transactions, and a relatively attractive valuation on a price-earnings basis is why I take a bullish view on this stock.

As an upfront disclaimer, I recently went long Visa’s (V) direct competitor – MasterCard (MA) - for reasons I outlined in a previous article.

That said, my hypothesis is that both companies have great exposure to a fast-growing global payments market, and wish to assess whether Visa would also be suitable for a long position at this time.

From a return standpoint, we can see that MasterCard has slightly outperformed Visa on a return basis during this time:

Source: investing.com

Moreover, we can see that while Mastercard’s earnings per share has grown at a faster pace than that of Visa over the past three years, the stock is also more expensive than Visa on a P/E ratio basis:

Earnings

Source: ycharts.com

P/E Ratio

Source: ycharts.com

However, looking at earnings alone may not tell the whole story. Earnings – broadly speaking – could be rising for reasons such as lower operating costs, lower taxes, etc. On its own, this metric does not necessarily reflect how a business is performing over the long-term.

Let’s compare Total Payments Volume (or Gross Dollar Volume) for Visa and Mastercard – both in terms of growth relative to last year and relative to one another.

We can see that for the most recently reported quarter – Mastercard’s GDV grew by just over 5%, whereas Visa reported slightly higher growth of 7%.

Visa

Source: Visa Q2 2019 Financial Results

Mastercard

Source: Mastercard Q1 2019 Earnings Presentation

Moreover, we also see that growth for the United States stood at 7% for Mastercard, and over 10% for Visa.

Therefore, while Mastercard has reported higher earnings, the growth in actual payment volume has been higher for Visa, particularly in the United States.

In terms of transactions, Mastercard saw equal gross dollar volume across credit and debit cards, while Visa has seen significantly more volume across credit card offerings – accounting for just over 55% of the total.

So, given the strong similarity in performance between both of these companies, are there any advantages of holding Visa relative to Mastercard? Conversely, are there any risks inherent to Visa that are not inherent to Mastercard?

When comparing both debit and credit card usage, the majority of contactless payments (85 per cent) is conducted through debit cards according to the Financial Times. Moreover, while credit card usage has been increasing, these have been more for the purpose of day-to-day spending instead of borrowing, given that the rate of growth in outstanding balances have been slowing. In this regard, given that Visa currently sees slightly more credit transactions rather than debit, this does mean that the company needs to grow debit transactions over the longer-term, as it is estimated that 36 percent of all payments will be made by contactless cards by 2027.

That said, growth in Visa’s debit transactions (13%) has outpaced that of credit transactions (9%) on a constant basis in the past year. Moreover, Visa’s market share for credit cards far surpasses Mastercard at almost 53%, with a share of 22% for the latter. Therefore, it is hardly surprising that Visa would see a higher credit card payment volume. However, the fact that debit transactions are growing is reassuring and shows that the company is not overly reliant on credit transactions to sustain its business.

Moreover, when one considers the future of credit card transactions, the Payment Processing Solutions Market is expected to see high growth through to 2024, up to USD 69.5 billion from USD 39.3 billion this year. This marks a CAGR of 10.4 percent per year. While debit cards have been increasing in popularity, credit cards are still preferred for higher-value purchases, and as a result is expected to have the biggest impact on the Payment Processing Solutions Market given the increasing demand for digital payments. Even though Amazon (AMZN) is seeking to enter the credit card market by catering to those customers with either bad or no credit history, the very fact that such credit cards are being aimed at lower-income customers will limit the overall transaction volume generated by these cards, and as such I do not particularly see a threat to Visa’s dominance in this regard.

To conclude, Visa appears to show strong performance in both the credit and debit card markets, and has shown solid growth in total payment volumes. While I am personally long Mastercard, I see Visa as a strong competitor, and see further upside for the stock from here – given the company’s growth record and relatively cheaper valuation on a P/E basis.

Disclosure: I am/we are long MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions.