In a year where the S&P 500, Dow, and Nasdaq have all underperformed by the end of the year; perhaps financial stocks can have solace. Much less volatile and still up from the outset of 2018, Visa may prove to be an outlier for 2019 as it has already shown safety of principal and strong growth in earnings and net income. While much can be made from the market's volatile recent months, weary economic outlook, Fed rate hikes, a brief bear market, and trade war; financials are an attractive and overlooked sector in my opinion.
The payments industry is beginning to get reshaped piece by piece. In terms of payments, cash transactions are slowly getting over-taken by more convenient forms of payment like credit/debit cards, Apple Pay, Square processors, Venmo and PayPal; not to mention Amazon's vice grip on e-commerce is hurting the demand for paper cash. Here is a helpful link to a Forbes' clip describing the dwindling demand for cash among millennials and in the Chinese economy: https://www.forbes.com/sites/heatherfarmbrough/2018/04/30/millenials-dont-want-cash-they-want-wallets-report-finds-especially-in-china/#4c6c276f1adf
Let's breakdown how Visa makes money and how their overall day to day business functions. Firstly, Visa provides transaction processing services (primarily authorization, clearing, and settlement) to financial institutions and merchant clients through VisaNet, their global processing platform. In fiscal 2018, Visa saw 182 billion payments and cash transactions roughly 500 million transactions a day. In addition, they offer a wide range of Visa-branded payment products which financial institution clients (banks) use to develop and offer core business solutions, credit, debit, prepaid and cash access programs for account holders: individuals, businesses and government entities. It is worth noting that total payments and cash volume grew to 11.2 trillion and more than 3.3 billion cards were available worldwide with the option to be used at nearly 54 million businesses. In regards to where Visa makes its profits, 3 segments garner most of the revenue: Services, Data processing, and international transactions. In 2018 data processing revenues eclipsed service revenues as the most profitable by accounting for $9 billion while service revenues were close behind with $8.9 billion.
Visa doesn't have a complete green light as with any stock. Morningstar's sell summary despite reflecting 0% of Robinhood's analyst rating is: "Visa's already large market share, and its relative dependence on U.S. spending and debit cards, may place it at a growth disadvantage. The increasing use of mobile technologies will usher in a new payment paradigm at some point. The global financial system is becoming increasingly regulated, and the biggest players will be the first victims.” I agree with this as they are valid points. However, the fact that Visa has the largest market share is a positive. Despite the notion that it's dependence on U.S spending, I believe that consumer behavior is going to continue in that direction. Credit card spending, especially among millennials, is going to increase as they enter the labor market. With the point of having the global financial system becoming more regulated, I understand the potential need for it as Visa, American Express, and Mastercard may be seen as monopolies and Visa getting the short end of the stick for that affecting earnings and revenue but the supply and demand will always be there. Overall, I think Visa's management has the tools needed to pivot and withstand any headwinds in their direction.
Qualitatively, I hypothesize that the convenience of card and mobile payments will contribute to the growth of Visa. I think Visa is a strong investment for the next 5 years; they have a strong economic moat. There is room for more spending and Visa is getting more innovative with their products. Recently, the released a popular ad for Visa tap to pay. Check it out: Eli Manning and Saquon Barkley tap to pay:
Quantitively, I made a DCF (Discounted Cash Flow) model on Visa to really see their margin improvement and overall growth within their balance sheet, income statement, and cash flows. I was highly impressed by the net income growth from 2017-2018. I believe this was in part due to the corporate tax break and also stronger use cases in data processing. I can tell this was the case because Visa's total income taxes dropped 50% from 4,995 to 2,505 (numbers in millions) from 2017-2018 respectively. Visa's net income increased a staggering 53% and that is a healthy sign of its financials. Moreover, I am predicting the revenue will grow 11% from 20,609 billion to 22,874 billion in 2019's fiscal year. The company's revenue growth was 12.3% in 2018 and assuming it does grow 11% this year is a very attainable mark for them. Lastly, I am impressed with Visa's free cash flow. They are sitting on close to 13 billion in cash. Lastly, Visa also trades at an EV/S ratio of 16% which is another stat I like.
Do you think Visa is on the verge of another breakout year?
More helpful articles on Visa from WSJ: