Visa: The Empire Strikes Back
Summary
- Many called for the disruption of Visa's business model.
- But Visa is actually growing faster than many fintech companies, including PayPal.
- Visa is outperforming expectations and remains a great long-term investment.
- Looking for a helping hand in the market? Members of Cash Flow Kingdom get exclusive ideas and guidance to navigate any climate. Learn More »
FinkAvenue/iStock Editorial via Getty Images
Article Thesis
According to what some investment gurus, analysts, and investors stated, fintech and buy-now-pay-later players were about to disrupt the legacy payment platforms such as Visa (NYSE:V) and Mastercard (MA). But as we have seen now, that isn't really happening. In fact, Visa's results showcase that it is roaring back and that its growth is actually way stronger than that of fintech companies such as PayPal (PYPL). Visa, the "Empire", shows its strengths in an economy where e-commerce is taking somewhat of a backseat and where international travel, dining out, etc. play into its hands. Thanks to excellent fundamentals, healthy growth, and attractive shareholder returns, Visa remains a strong investment.
Disruptors Versus Legacy Payment Players
Visa and Mastercard had been delivering excellent results for quite some time. But during the pandemic, when e-commerce took off and when many not-yet-profitable companies saw their shares soar, a new narrative gained traction. Credit card companies supposedly were losing against so-called disruptive tech companies, which includes a wide range of fintech players including PayPal, Block (SQ), and many buy-now-pay-later companies. According to the arguments made by some, those companies were eating Visa's lunch, due to their better tech, lower costs for vendors, and so on. But as we see now, that narrative doesn't really hold - it's the disruptors that see their shares slump in recent months, and it is Visa and Mastercard that deliver excellent and estimates-beating results.
Visa Had A Great Quarter
Visa, the largest payment company by market capitalization, just reported its fiscal second-quarter results that easily beat analyst expectations:
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Revenue was up by a hefty 25%, and earnings per share rose by an even better 30%, with the outperformance primarily stemming from share repurchases that reduced Visa's share count.
Visa was able to beat estimates by more than 5% thanks to stronger than expected payment volumes. Those, in turn, were partially explained by the fact that travel recovered faster than expected:
Visa presentation
We see that overall payments volume rose at a compelling high-teens rate, but cross-border volume grew even faster. Those payments rose by 38% when we include intra-Europe payments, but since there are no currency differences there due to the usage of the Euro, Intra-Europe cross-border volumes are not as relevant. When we focus on areas outside of Europe, growth was even better, at almost 50%. Following two years of pandemic-related lockdowns and travel disruption, consumers are clearly eager to travel more - and to spend more money when traveling. That's great news for Visa and a growth driver that should remain in place. In fact, it looks like cross-border payments volume could grow even faster during the summer months of this year. Several airline management teams have made remarks that indicate their revenue will be higher this summer compared to pre-pandemic levels, which bodes well for overall international travel. This, in turn, should help Visa benefit from strong cross-border payments volume growth in the coming quarters, which will be positive for its revenues and margins.
With this growth, Visa actually performed better than PayPal, which is one of the companies that some investors and analysts touted as a disruptor. PayPal, for reference, was able to grow its revenue by just 8% during the most recent quarter, and it had to lower its earnings per share guidance by a massive 20% relative to the consensus estimate for this year's profits. It seems to be pretty clear that PayPal and other fintech companies are now feeling a pandemic hangover similar to what Netflix (NFLX) has been experiencing. The macro environment has changed, and with the pandemic coming to an end, tailwinds such as people staying at home and shopping/consuming there are no longer driving extraordinarily high business growth for PYPL and others. Instead, Visa benefits from more spending in the real world, as consumers are traveling more, spending more at brick-and-mortar retailers, dining out more, and so on. PayPal and other fintech companies are not relevant players when it comes to facilitating these transactions, which is why the shift back towards "real-world spending" is hurting the so-called disruptors while boosting the prospects of Visa (and Mastercard).
Visa Has Great Fundamentals, A Compelling Outlook, And Healthy Shareholder Returns
Visa has always sported strong fundamentals, but what was strong in the past has gotten even better. The company does generally not see its expenses rise in line with revenue, as a significant portion of those expenses is fixed. Once the infrastructure to handle transactions is in place, it does not cause significant additional expenses to handle an additional transaction. In Q2, despite inflationary impacts on wages, etc., Visa's overall expenses rose by 11% -- which is way less than the 25% revenue gain. With Visa's business growth outlook being strong for the remainder of the year as well, we could see more of the same in the coming quarters.
Eventually, growth should moderate, as no company can grow at a 25% clip forever. But analysts are forecasting that revenue will rise by 13%, 12%, and 10% in 2023-2025. With some operating leverage added, 15% annual net income growth should be achievable. When we account for the fact that Visa tends to perform better than what Wall Street is forecasting, actual results could be stronger, of course.
Last but not least, Visa can turn a mid-teens or high-teens net income growth rate into somewhat higher earnings per share growth thanks to its ongoing buybacks. Visa throws off large amounts of cash, and since no huge investments are needed, most of that ends up as free cash flow that can be paid out to the company's owners.
Visa has steadily increased its buybacks over the years as cash flows continued to climb. Due to the rising share price, the buyback pace relative to the overall share count has not changed too much, however. In the above chart, we see a steady decline in Visa's share count, which dropped by a couple of percentage points per year. That doesn't change things dramatically in the short term, but for long-term holders, the decline in Visa's share count has created significant value, as each share's portion of the company's profits has risen by around 30% over the last decade. This does also lift the value of each share by 30%, all else equal, thereby juicing total returns quite meaningfully over a multi-year period.
Visa Stock's Valuation Is Attractive Considering The Growth And Quality
Visa can be described as a company with way above average quality. Its fundamentals and its balance sheet are very strong, and as we see in the company's recent results, its moat is very much intact - "disruptors" aren't actually disrupting Visa, as it remains the payment technology king in the real-world environment.
When we consider these factors and Visa's compelling growth outlook for both 2022 and beyond, its current valuation doesn't seem outrageous at all:
Paying a little over 30x net profits for a company that is growing its revenue at a 25% rate is not a bad deal, I believe. In the above chart, we also see that Visa used to trade at a significantly higher valuation in the past, as its 3-year and 5-year median earnings multiples are in the high 30s. Compared to that, Visa is valued at a discount of roughly 20% today - despite the fact that the broad market has run up over the last three to five years. Investors might also want to consider that Visa's actual earnings per share could come in above expectations this year, indicated by the better-than-expected Q2 results. This would also align with Visa's history of beating expectations in most quarters.
When we look at the company's EV/EBITDA multiple, which accounts for debt usage and cash on the balance sheet, Visa still looks somewhat inexpensive compared to the past valuation range. The discount is less pronounced here, however, at just a couple of percentage points versus the 20% discount when we look at the earnings multiple. Overall, we can say that Visa is not a cheap stock in absolute terms. But based on the overall quality of the company and its compelling growth, the current valuation should be justified. Visa also trades at a discount compared to how the company was valued in the past, at around 10%-15% when we look at the average between the P/E discount and the EV/EBITDA discount. Visa could thus have double-digit upside potential in the near term, on top of its more pronounced longer-term upside potential from business growth and shareholder returns.
Takeaway
Some had been proclaiming major problems for Visa and its peers due to purported "disruption" by a wide range of fintech players. But as we see now, that was way overblown/untrue. Visa remains the king in the payment technology space, benefits from real-world spending growth (dining out, travel, etc.) and is actually growing faster than PayPal and many other fintech "disruptors". The "Empire" is back, and I remain happy with my long position.
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This article was written by
Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He has been sharing his research on Seeking Alpha since 2014. Jonathan’s primary focus is on value and income stocks but he covers growth occasionally.
He is a contributing author for the investing group Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of V, MA either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (23)
2. Recession
3. Maybe the best inflation hedge out there as they charge a % not a flat $ price and can easily expand.#2 is the most important short term. Crypto, competition and gov regulation most important long term.This company prints money and has insane margins. It’s a racket. It’s growing and it even pays a growing dividend.
V and MA do not take on credit risk on their credit card products. The credit risk sits on issuer banks' books. OTOH, Amex contracts credit risk on its card issuances directly. V and MA are not comparable to AmEx credit cards.
Agree. And while Russia was no bonanza for Visa, ceasing operations there will certainly have a negitive effect on earnings going forward.
