Description

Thesis

• High quality growth compounder currently trades at/near 10-year relative low valn; secular and competitive concerns likely overblown; high quality oligopoly drives extremely attractive economics

• Business has durable long-term tailwinds

  • Long-term trend away from cash (cash + check) usage

  • Cash/check usage 40% in 2015 → 25% currently; trend expected to continue

  • Move to online shopping an important driver of trend towards cashless

  • V has garnered consistent gains in global consumer payments market share: 15.3% (2017) → 17.0% 2021

  • Credit card industry is a solid oligopoly which lends itself to defensible industry pricing: global credit card market shares (top 4) by purchase transactions: Visa 50%, Mastercard 26%, UnionPay (Chinese) 20%, AmEx 3%

• Move from cash → cashless

• Market share

• These trends have driven consistent double digit payment volume CAGRs for Visa over the medium-term; volumes slowed during COVID but are now reaccelerating

• Return of cross-border transaction provides additional near-to-medium term tailwind

  • International transaction revs as % of total gross revs: 2019 27%, 2020 20%, 2021 20%

  • Current management guidance for fiscal 2022 that cross-border transactions return to 80-85% of 2019 levels, with full recovery by summer 2023

• Cross-border transactions are meaningfully more profitable than domestic transactions; estimate that cross-borders fee/transaction is 9x vs domestic

• COVID meaningfully reduced cross-border transaction volume; this has been returning slowly

• Market currently has multiple structural concerns, many/most of which appear overblown

  • BNPL is growing rapidly, and market is largely viewing it a threat to the payment networks as it can theoretically be used to route payments outside the networks (direct debit to bank account using ACH)

  • However, BNPL currently represents more of an opportunity than a threat

    • Average BNPL transaction is 37% higher than average non-BNPL transaction, so net $ flow over payment network for average BNPL transaction modestly above that of average non-BNPL transaction (i.e., 137% of 75% = 103%)

    • V/MA are powering the BNPL’s virtual card product; V/MA issue what are effectively 1-time card numbers for transactions done through BNPL providers’ websites

    • V/MA are providing white label solutions for BNPL providers

  • 75% of BNPL payments currently flow over the payment networks; roughly 45% via debit and 30% via credit

  • Payment network fees are combination of fixed fee + variable % of transaction value; with typical BNPL transaction generating 4 monthly payments, fixed fee portion of payment network take is 4x that of a non-BNPL transaction

  • Other BNPL revenue streams

  • ACH transactions (direct bank-to-bank transfers) can move payments outside the existing payment networks, posing a threat to payment network volumes

  • Reality is that ACH functionality has existed for years, but has not meaningfully slowed payment network volume growth

  • Payment networks provide important security features/guarantees, standing between consumers and payment recipients; fraud protection for consumers; many consumers are understandably loath to provide bank account information directly to payment recipients

  • While economics for retailers and service providers are preferable for ACH, it is questionable whether the economic incentive outweighs the convenience of using the well-established (and consumer friendly) existing payment networks

  • As an example, PayPal tried aggressively to incent consumers to move to ACH payments versus payment networks a number of years back but ultimately backed off; associated savings was insufficient to drive consumer demand

  • Crypto payments move outside existing payment networks, posing a theoretical threat

  • Volatility of crypto pricing makes it a relatively undesirable medium of exchange

  • Current estimate that 9% of businesses accept crypto for payment (statistic undocumented)

  • Transaction costs for crypto are high…often orders of magnitude above existing payments networks; moreover, a portion of the transaction expenses for crypto are explicitly borne by the consumer (as opposed to generally being hidden from consumers for payment network transactions)

  • Threat of other new technologies is always present; reality is that the overwhelming majority of these technologies end up being built on top of the existing payment network infrastructure; good example are digital wallets (Google Pay, Apple Pay)

• Buy Now, Pay Later (BNPL)

• ACH

• Crypto

• Other new technologies

• Fee pressure

• Amazon UK recently stated publicly that it would stop accepting Visa credit cards in the UK (early 2022) due to unreasonably high fees; moreover, it indicated an intention to move its co-branded credit cards away from Visa to a competitor

• This is likely a public negotiating posture; similar public pronouncements have been made in the past by Kroger and Walmart, both of which were resolved in a mutually acceptable fashion

• Proposed ban applies only to Visa credit, not Visa debit; debit is much more prevalent in the UK, with Visa debit accounting for 3x the volume of Visa credit

• Assuming worst case scenario: 1) co-branded Amazon cards currently represent just 0.04% of total V volumes, ii) assuming the dispute moved to NA, with 30-40% of NA volumes moving thru Visa networks, total exposure is ~1% of overall V volumes

• Legal exposure

• Oligopolistic nature of industry constantly attracts regulatory scrutiny across geographies

• Visa received Civil Investigative Demand in Mar 2021 from DOJ; relates to Visa limitations on merchant customer’s ability to route debit transactions over PIN-based networks, which are typically cheaper (from merchant standpoint) than Visa’s signature-based network

• Reports indicate that DOJ investigation may extend to incorporate Visa relationship with fintech companies

• Worst case scenario (per UBS) of 5% EPS hit

• Attractive economics

• Oligopolistic nature of industry drives extraordinary economics

• 70% EBITDA margins

• 20%+ ROICs, 30%+ ROEs

• Negative working capital cycle

• Extremely consistent earnings growth algorithm; company delivers at or above consensus expectations like clockwork

• Valuation

  • P/E: 1.3x S&P

  • EV/EBITDA: 1.55x S&P

• Company currently trading at/near 10-year relative valn lows

 Business

• Global payment solutions provider

• Gross revenue breakdown

• Data Processing Revenues (39% of total) – authorization, clearing, settlement, value-added services, network access, maintenance and support services

• Service Revenues (35% of total) – services provided in support of client usage of Visa payment services

• International Transaction Revenues (20% of total) – cross-border transaction processing and currency conversion activities

• Other Revenues (5% of total) – license fees for use of Visa brand or technology, fees for account holders’ services, certification, and licensing

  Upside/Downside

• Value accretion/compounding analysis

• ~17% annual accretion from combination of rev growth (12.5%) + very modest margin expansion + FCF accretion

• Addl 24% upside from multiple expansion back to historical levels (5-yr average multiple relative to S&P 500 ~1.9x S&P 500 EV/EBITDA mult)

• Yields 2-yr return of ~70%

• Blended P/E and EV/EBITDA target multiple approach on 2024 fiscal yields similar upside assuming return to average relative multiples
• Solid downside protection @ 1.1x S&P 500 relative multiple; much higher quality business (better growth prospects, far superior ROIC/ROEs, better margins)

 Risks

• AmEx likely to regain some lost market share in the near-term as travel and entertainment spending rebounds post-COVID

• Omicron impact on cross-border volumes

• Regulatory overhang

• Secular threats (crypto, alternate technologies) prove more competitive than expected

• Macro exposure; consumer weakness

Catalyst

Return of normalized levels of cross-border transactions; continued LDD volume growth negates concerns over BNPL, crypto, etc.; regulatory overhang abates