Summary

• There are still trillions of dollars in transactions paid for with cash/checks throughout the world creating long-term growth opportunities for Visa.
• Visa is poised to benefit from further growth in developing regions/growing economies.
• Visa is likely to grow at a strong pace over multiple years as they apply their strengths to the tailwinds of the global trend of transactions increasingly becoming cashless.

Visa (V) operates as a global payments technology company that enables fast, reliable payment transactions in over 200 countries. Visa is benefiting from the trend of many consumers moving to cashless payments. They are also benefiting from the growing e-commerce market. 

The company earns most of their fees on every payment transaction made when Visa’s account holders use their cards/accounts. The issuing banks bear the credit risk. Visa acts like a toll-taker, collecting more money as more cashless transactions and e-commerce continue to grow. These fees are earned from merchants because the company handles the authorizations, clearing, and settlement for the transactions from their account holders. The company also earns data processing revenue and international transaction revenue. 

Visa demonstrated a strong ability to take advantage of new payments technology over the years. For example, Visa benefits from transactions from Apple Pay (AAPL), Google Pay (GOOG), and PayPal (PYPL) when the accounts bearing the company name are linked to these services. 

Strengths

Visa is a wide-moat business since it would take an incredible effort for a new company to establish relationships with millions of merchants and thousands of banks and convince them to join their payments network (high barrier to entry).

• The company benefits from millions of transactions which diversifies their revenue across millions of merchants and products. 
• Visa achieves high profitability metrics: Gross Margin of 97%, EBITDA margin of 67%, ROIC of 17.6%, and ROE of 37%. 
• Consistently grows earnings at strong double-digit rates (over 20% annual EPS growth over past 5 years). The company is expected to grow EPS at over 15% annually over the next 5 years (consensus). 
• Strong cash flow: Over the past 12 months, Visa had over $12 billion in operating cash flow and over $10 billion in free cash flow. The free cash flow benefits shareholders since it is used to pay dividends and for share buybacks.

source: Visa 10-K

• The company’s secure data centers provides protection from crime, terrorism, and natural disasters.
• Visa has the highest market share in the industry of 61.5% as compared to MasterCard’s (MA) 25.2%, American Express’s (AXP) 11.1%, and Discover’s (DFS) 2.2%.

source: cardflash.com 

Weaknesses

Visa doesn’t have that many weaknesses, but there are some areas that they can improve on.

• Visa’s operating expenses increased at a higher pace (18%) as compared to revenue growth of 14% in 2018 over 2017. The company will need to keep costs under control so that this trend doesn’t continue. Operating expenses increased at a lower pace of 6% in Q1 2019 as compared to revenue growth of 8%. So, we’ll have to see how this continues going forward. 
• The company has a significant amount of total debt on the balance sheet of $16.6 billion as compared to total cash of $11.5 billion. The good news is that Visa’s strong positive cash flow allows the company to handle their obligations.
• Visa is subject to litigation from merchants regarding their fees. In 2018, Visa and MasterCard had to pay $6.26 billion in a class action lawsuit on antitrust grounds.  The merchants felt that they were being overcharged for fees. Visa will probably remain under scrutiny from merchants in regard to their fees.

Opportunities

There are multiple opportunities for Visa to consider to continue their strong pace of growth for the long-term.

• There are still $17 trillion in payments that were conducted in cash/checks on a global basis in 2018. So, there is a large opportunity to grow into new developing markets. As economies develop, they are likely to increasingly use non-cash forms of payment over time. Visa can strive to gain new business in these regions.
• Visa can get involved with blockchain and digital currency. Visa’s B2B Connect program provides financial institutions with a fast, secure, and reliable way to process corporate B2B transactions across borders. The B2B connect program can be a foundation for Visa to build more efficient cross-border transactions using blockchain technology.
• Acquisitions are always a strategic opportunity for Visa. The company recently acquired Earthport, a company that allows cross-border payments for banks, money transfer service providers, and businesses on a global basis. Visa is working to improve the Earthport technology to make it faster, safer, and easier to pay. The technology is moving towards making fast cross-border payments between bank accounts instead of the less efficient wire transfer method.
• Visa can look for other strategic acquisitions to help the company maintain and grow market share.

Threats

While Visa is a solid, consistent company, there are numerous external threats that could act as negative catalysts.

• Competitors such as MasterCard could create desirable payments technology/services which could take market share away from Visa.
• Visa is exposed to currency fluctuations in international markets. The company’s revenue could be negatively affected if currencies are trading unfavorably.   
• Security breaches or cyber attacks could cause consumers to fear using Visa credit/debit accounts. Consumers could move to other branded accounts as a result.
• The company risks government regulation and central bank oversight. Each country has their own laws and regulations. The regulations of certain countries could create challenges in doing business there. Government-backed digital payment programs are an example of a policy that could make conditions difficult to compete with. 

Long-Term Business Outlook for Visa

Overall, Visa’s business looks poised to continue to grow at a strong pace as developing regions increasingly move to cashless payments. The increasing use of smartphones for payments using Visa accounts is an example of how the company is likely to benefit in developing nations/growing economies.

There are still opportunities for new technology to enable faster, secure payments across borders and between bank accounts. Visa is moving in the direction of creating solutions to solve these issues. Visa’s strong market share and global presence will help the company establish trust in new growth regions. 

Disclosure: I am/we are long V.

Business relationship disclosure: This article was written by David Zanoni with guidance from Kirk Spano.

Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.