We review our investment case on Visa Inc. (NYSE:V) based on developments in the past few months. Visa shares have fallen approximately 10% in the past year and are down 19% from their peak last July:
Librarian Capital's Visa Rating History vs. Share Price (Last 1 Year)
We believe Visa shares are highly attractive at present. Structural growth and the recovery from COVID are continuing, as evident in Q2 FY22 results released in April. The exit from Russia will be mostly offset by growth, and full-year outlook was only reduced slightly. Inflation is a net positive for Visa and it should also be resilient in any downturn. The dispute with Amazon (AMZN) has been fully resolved. The stock trades at a reasonable 32x CY21 EPS, on earnings that were still impacted by the pandemic. Our forecasts indicate a total return of 103% (23.9% annualized) by September 2025. Buy.
Our investment case on Visa has been based on our belief that its low-teens EPS CAGR and premium valuation would continue, driven by:
COVID-19 has been a net negative for current Visa earnings, primarily due to the disruption of high-margin cross-border travel volumes, but its acceleration of the shift to electronic payments should be beneficial over the long run.
Visa’s structural growth is continuing, as evident in Q2 FY22 (ending March 31) results released in April.
In Q2 FY22, on a year-on-year basis and excluding currency, Payments Volume grew 17% year-on-year; the number of Payment Transactions grew 16.0%; volumes are lower sequentially due to the holiday season in Q1 FY22:
Visa Operational Performance (Q2 FY22 vs. Prior Periods)
For the P&L, these mean Net Revenues grew 26% year-on-year. Operating Expenses grew just 19%, so Non-GAAP EBIT Margin expanded 271 bps (to 68.2%) and Non-GAAP EPS grew 30%:
Visa P&L (Non-GAAP) (Q2 FY22 vs. Prior Periods)
Currency was a small tailwind, subtracting approx. 1 ppt from Net Revenue growth but approx. 3 ppt from OpEx growth. Acquisitions, including Tink and CurrencyCloud, added 0.5 ppt to Net Revenues and 1.5 ppt to OpEx.
Every revenue line grew by double-digits year-on-year. International Transaction revenues grew 48.4% year-on-year (including currency) thanks to the continuing recovery in cross-border travel. Value-added services revenues, reported in Service revenues and Other revenues, grew “over 20%”.
Visa’s suspension of all Russia-related activities on March 5 actually was a positive for Q2 FY22 (but will be a negative in subsequent quarters) for accounting reasons. As Service revenues are based on volumes in the preceding quarter and the suspension caused an immediate recognition this quarter, Visa actually “recorded almost two quarters of Service revenues related to Russia” during Q2 FY22.
Compared to Q2 FY19, Visa has achieved growth of 33.2% in Payments Volume, 30.9% in Net Revenues, 34.6% in Non-GAAP EBIT and 40.2% in Non-GAAP EPS over 3 years. While COVID-19 has accelerated the shift to electronic payments, it also still represents an ongoing headwind. Visa’s strong double-digit growth across this period therefore supports our view that it will continue to be able to sustain a low-teens or higher EPS CAGR.
Visa’s volumes are continuing to recover from COVID-19.
In the U.S., total Payments Volume was 44% higher than 3 years ago in Q2 FY22, a 2 ppt acceleration from Q1 FY22; the first 3 weeks of April showed a further 1 ppt acceleration, to being 45% higher than 3 years ago:
Visa U.S. Payments Volume Indexed to 3 Years Ago
Internationally, excluding China, total Payments Volume was 40% higher than 3 years ago in Q2 FY22, a 2 ppt deceleration that management attributed to the Omicron resurgence in early January.
Indexed to the level 3 years ago, Cross-Border Volume Excluding Intra-Europe volume already surpassed 100% in Q1 FY22, and reached 120% in March. Cross-Border Travel Excluding Intra-Europe volume reached 94% (90% excluding a spike in Russia and Ukraine) in March, compared to approx. 80% in November and December, after a low of 71% in January (due to the Omicron resurgence):
Visa Cross-Border Volume, Indexed to 3 Years Ago (Ex. Intra-Europe & FX)
These Travel volumes were achieved with significant restrictions still in place in China, as well as in key Asian markets including Japan, Korea and Taiwan. Asia overall was still at less than 40% of the level 3 years ago during the quarter, while U.S. in-bound travel volume was still just 90% of the level 3 years ago.
Russia-related revenues were a significant part of Visa’s business.
Visa has disclosed that Russia was 4% of Net Revenues in FY21, and Ukraine was another 1%. However, Russia’s actual importance is higher than these figures indicate. For example, for the Visa Direct processing solution, Russia was the second largest market and represented 17% of its transactions in FY21.
Mastercard has described its activities in Russia as faster-growing and higher-margin than the group average, due to good penetration of value-add services, high-yielding outbound cross-border volumes, and a "strong remittances and disbursements market". The same appears to be the case for Visa.
In Visa’s revised outlook, the loss of 4 ppt of Net Revenues related to Russia is expected to be offset by the loss of 2-3 ppts of OpEx, and the overall FY22 outlook has been revised only slightly downwards thanks to other factors.
Visa has revised its FY22 outlook for stronger-than-expected cross-border volumes, acquisitions, the removal of Russia-related revenues and expenses, as well as stronger currency moves. Management now expects:
Taking the mid-point of each range, we believe these comments imply a FY22 Net Income growth of 13.9%, compared to 15.6% previously:
Visa Non-GAAP P&L Outlook (FY22) (Our Estimates)
The full-year outlook assumes continuing stability in domestic volumes (except in Russia and Ukraine), “strong and stable” e-commence levels, and cross-border travel returning to 2019 levels by FY22 year-end (September).
Management also provided an outlook for Q3 FY22. Again, the mid-point of each range implies an approx. 13.3% year-on-year growth in Net Income:
Visa Non-GAAP P&L Outlook (Q3 FY22) (Our Estimates)
We believe management expectations are reasonable.
Visa will be a “net net” beneficiary of inflation, according to management comments on the Q2 FY22 call, benefiting primarily from automatic increases in its volume-based fees, offset by lower consumer discretionary purchases, weaker volumes for its high-margin U.S. in-bound corridor, and increases in its OpEx.
Visa will also be resilient in the event of a recession, as demonstrated by Mastercard’s performance during 2007-9 (Visa did not exist in its current form then), when Net Revenue growth continued to be positive, and EBIT continued to rise except for a one-off litigation settlement in 2008:
Mastercard GAAP P&L (2007-09)
So far Visa has not observed any meaningful impact from macro headwinds. As CEO Al Kelly commented during his appearance at the JPMorgan conference on May 24:
"The consumer seems quite healthy despite inflation, supply chain issues, the war in Ukraine, rising constraints et cetera … because there is still so much pent-up demand … What really dropped off during the pandemic was the higher levels of spend strata. And what we’re really seeing in the last nine or 10 months is the affluent customer coming very much back into the market.”
He also reiterated the same expectations for Visa’s FY22 outlook.
Visa’s dispute with Amazon has been fully-resolved, and the company announced at Q2 FY22 results that, in addition to the renewal of the U.S. Amazon Prime Rewards Visa Signature Card announced in March, Visa has also reached a “broad global settlement” with Amazon that “the acceptance of Visa at all Amazon stores and sites today as well as a joint commitment to collaboration on new product and technology initiatives”.
At $203.84, relative to CY21 financials, Visa shares are trading at a 32.1x P/E and a 3.3% FCF Yield:
Visa Net Income, Cash Flows & Valuation (Since FY19)
Visa pays a dividend of $0.375 per quarter ($1.50 annualized), having raised it by 17% year-on-year in October. This implies a Dividend Yield of 0.7%.
Visa repurchased another $2.9bn of shares in Q2 FY22, at an average price of $210. The $12.0bn buyback program announced in December 2021 has $9.8bn remaining, equivalent to 2.2% of the current market capitalization.
We have been assuming a 40x exit P/E for Visa stock (42x P/E for Mastercard), which we believe is fair given the quality of the earnings (in terms of both resilience and growth). A 40x P/E also translates to a 2.5% "yield," slightly lower than the current 30-year U.S. Treasury yield of just under 3%.
We believe Visa stock is undervalued.
We slightly reduced our FY22 Net Income, in line with the new outlook, but keep the rest of our forecasts unchanged:
Our new FY25 EPS forecast of $10.18 is 1.5% lower than before ($10.34)
Illustrative Visa Return Forecasts
With shares at $203.84, we expect an exit price of $414 and a total return of 103% (23.9% annualized) by September 2025, in just over 3 years. Most of the return will be driven by growth, with a FY21-25 EPS CAGR of 14.6%.
Visa shares have fallen approx. 10% in the past year and now trade at 33x CY21 EPS.
Q2 FY22 results confirmed its continuing structural growth and recovery from COVID-19, with EPS up 30% year-on-year.
The exit from Russian will be mostly offset by growth; FY22 outlook was only reduced slightly and reiterated at a recent conference
Inflation is a net positive for Visa and it should be resilient in any downturn. The dispute with Amazon has been fully resolved.
With shares at $203.84, we expect a total return of 103% (23.9% annualized) by September 2025, mostly driven by EPS growth.
We reiterate our Buy rating on Visa.
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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.