Visa Inc. V
December 02, 2021 - 11:26am EST by
zzz007
2021 2022
Price: 195.70 EPS 7.06 8.45
Shares Out. (in M): 2,168 P/E 28 23
Market Cap (in $M): 424,300 P/FCF 30 27
Net Debt (in $M): 760 EBIT 19,120 22,200
TEV (in $M): 425,060 TEV/EBIT 22 19

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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

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

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

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