Some investors limit their knowledge of a company to its stock price behavior. However, this is a fundamentally flawed way of investing because: "In the short run, the market is a voting machine. In the long run, it's a weighing machine." – Benjamin Graham
Relative Superior investment methods are:
1, look for quality businesses;
2, invest in them when they are attractive/fair value;
3, hold for the long term.
This strategy is much less stressful and time-consuming. Take Visa (V.US) as an example, the value of Visa has received an average annual total return of more than 22%. In other words, investors who put in $100,000 that year have grown to $1,547,000 without any "effort" as long as they hold it for the long term.
But no matter how good Visa's historical ROI is, and it's not relevant to people who have never invested in the company, what we need to care more about now is its future total ROI potential. As Visa is facing some bearish factors, this has led to a recent pullback in its stock price.
Note: Many of the things I mentioned in this post also apply to MasterCard (MA.US). Both companies are high-quality businesses with bright futures, and if you can't make up your mind to make a choice, it is recommended to hold both. Although there are some differences between Visa and MasterCard.
Visa - Overview
Visa is one of the world leaders in digital payments. It facilitates the global flow of commerce and money between consumers, merchants, financial institutions, corporations, strategic partners and government entities around the world through innovative technologies in more than 200 countries and territories.
Visa - Risk Analysis
The first important source of information to understand the company is Item 1 of its Fiscal 2021 10-K.Item 1A deals with key risks and reads:
The U.S. Department of Justice is investigating Visa's ties to major fintech companies as part of its antitrust probe of the card giant. Antitrust investigators are investigating Visa's financial incentives to Square Inc., Stripe Inc. and Paypal Holdings Inc.
Visa declined to comment for this story. But in March 2021, the company said the U.S. Justice Department was investigating its lending practices to determine whether it had unfairly competitive practices in the debit card market.
But there is precedent for this risk. As early as 2010, the U.S. Department of Justice investigated the credit card payment industry. The final result was that Visa and MasterCard reached a settlement with the U.S. Department of Justice, when they agreed to allow merchants to provide consumers with Incentives to use low-cost credit cards.
Also Visa is involved in a number of legal matters. Interested investors can refer to Note 20 (pages 99-105) in the 10-K report for the fiscal year 2021 for details, which will not be introduced here due to space limitations.
Amazon’s (AMZN) dispute with Visa
Recently, Amazon said it would stop accepting Visa credit cards issued in the UK starting January 19, 2022; Amazon accounts for less than 1% of Visa’s UK credit card volume. Amazon said the move was due to Visa's high fees for credit card transactions; however, Visa debit cards will still be accepted.
The dispute augurs badly for the credit card industry as a whole, although eventually Amazon may make some concessions on the UK side. That could herald a future fight in the larger U.S. market, some analysts said.
Amazon also said it was considering dropping Visa as a partner for its Amazon Prime Rewards credit card; it was also considering using American Express (AXP) or MasterCard's Prime credit card instead.
While Visa is disappointed by Amazon's decision, Visa's fee structure has undoubtedly been a topic of discussion for a long time, and Visa will likely stick to its stance and won't make any concessions. Recently, Visa’s CEO stated: “It is clear that we are in the midst of a challenging negotiation. But the difference is that Amazon has decided to make the negotiating challenges we have faced public, and oddly chose to threaten to punish consumers.”
Despite the current challenges of working with Amazon, Visa's CEO and CFO hope the two sides can resolve their disputes in the U.S. and U.K. On November 19, Visa's chief financial officer said: "We have addressed these issues in the past, and I am confident that we will address them in the future. Analysts believe Amazon is using negotiation tactics similar to those used successfully by other retailers.
Buy Now Pay Later (BNPL)
In 2020, credit cards accounted for one-third of North American e-commerce spending. However, mobile payment methods like Venmo and Buy Now Pay Later (BNPL) financing programs are eating into market share . According to Worldpay (acquired into Fidelity National Information Services (FIS)), the share of credit cards in North American e-commerce spending fell by about 7% in 2020. Conversely, BNPL's share increased by 78%, making the It became the fastest growing form of payment.
Although alternative payment methods have been growing for years, the pandemic has accelerated the decline in credit card adoption; the popularity of BNPL financing is growing rapidly especially among young consumers.In response to e-commerce Erosion of spending, Visa announced on October 27, 2021, that a growing number of issuers, acquirers and financial technology companies are leveraging its technology to bring BNPL options to their customers.A recent study by
Visa found that around 42% of all consumers globally expressed interest in the installment financing offered by their existing credit card or one they could apply for. To help partners meet this need, Visa installment solutions are being deployed globally to make BNPL options offered by card issuers available in stores and e-commerce channels. Through this web-based solution, financial institutions can add BNPL's customized capabilities for credit card holders on an already approved line of credit. Acquirers on the network can also activate their installment capabilities at any retailer that accepts Visa.
On its fourth-quarter earnings call, Visa said that while installment payments are growing rapidly, they are a small fraction of the overall industry payment volume.
Bringing scale to disruptors through a two-pronged strategy, Visa will provide a web solution as well as a solution for its BNPL fintech partners; the web solution provides issuers with the ability to extend installment payments to their existing credit customers , and offers merchants a seamless installment payment option with flexible terms to their customers.
Through partnerships with fintech companies, Visa Inc. generates revenue when customers make B2B or consumption payments through virtual Visa cards and installments through value-added services. Most installments are now paid by credit card. In Canada, for example, the number of Visa cards used for instalments grew by more than 300% last year.
Acquires Tink
On June 24, 2021, Visa Inc. announced that, a few months after announcing that it had abandoned plans to acquire Tink's U.S. competitor Plaid, it had signed a definitive agreement to acquire Swedish financial technology company Tink; Visa Inc terminated a planned $5.3 billion deal with U.S. data-sharing platform Plaid in January 2021 after the U.S. government blocked the deal on antitrust grounds.
Tink is a European open banking platform that enables financial institutions, fintech companies and merchants to build tailored financial management tools, products and services for European consumers and businesses based on their financial data. The terms of the acquisition are 1.8 billion euros ($2.2 billion), including cash and retention awards.
The transaction is subject to regulatory approval and other customary closing conditions. Visa will fund the deal with cash on hand. The transaction will have no impact on Visa's previously announced stock repurchase program or dividend policy.
Acquires Currencycloud
On July 22, 2021, Visa announced its intention to acquire British cross-border payment provider Currencycloud at a valuation of £700 million (approximately $962 million). Launched in 2012,
Currencycloud facilitates cross-border payments for nearly 500 banks and technology companies, including well-known European financial technology companies Klarna, Monzo, Starling and Revolut. Since its launch, it has moved more than $75 billion in payments to more than 180 countries. Visa has been a Currencycloud shareholder since 2020; the financial consideration will be less the stake Visa already owns in the startup. The transaction is also subject to regulatory approvals and other customary closing conditions.
Visa will fund the deal with cash on hand. The transaction will have no impact on Visa's previously announced share repurchase program or dividend policy.
Cybersource
Visa's solution, CyberSource Payments, processes debit, credit and closed-loop gift cards globally and across multiple channels with unmatched scalability and security. It supports a large number of payment card and recurring billing options, spanning multiple gateway and acquiring bank choices, all through one connection.
Using CyberSource solutions, merchants can accept payments (cards, digital payment services, alternative payments) in over 190 countries, finance in over 20 currencies, and protect customers from fraudulent losses. Payment security and tokenization solutions can accept payments via web, mobile and call center/IVR.
In fiscal 2021, CyberSource added 28 new acquiring partners and 45,000 merchants, enabling payment volumes to grow twice as fast as Visa's broader customer base. Additionally, Visa's risk solution on CyberSource, called Decision Manager, grew by more than 30%.
In the past year, Visa Inc. has doubled its token count to 2.6 billion and has enhanced its ability to manage tokens through Visa Cloud Tokens. Across more than 8,600 card issuers and 800,000 merchants, the token increased approval rates by 2.5% and reduced fraud by 28%.
Visa Advanced License and Visa Risk Manager use artificial intelligence and machine learning capabilities. 30% more transactions were screened in 2021 than in 2020, helping to reduce fraud by $26 billion.
Visa's efforts in authentication, risk, identity and authorization optimization have resulted in a nearly 2% increase in the approval rate for cross-border cardless payments over the past year. Additional transaction volumes were also driven by a 25% increase in value-added services (VAS) revenue in the fourth quarter. Since the start of the COVID-19 pandemic, Visa's value-added services revenue has grown more than a dozen-fold on average quarterly, reaching about $5 billion in fiscal 2021.
Visa - Financial Overview
Take a look at Visa's fourth quarter and fiscal 2021 results.Visa's solid performance demonstrates the resilience of its business against a backdrop of economic uncertainty and the lingering impact of COVID-19. This further validates the company's growth strategy as the company continues to rapidly develop digital payments and innovative ways to move money around the world.
The company's fiscal year end on September 30 means that fiscal 2021 results include two very different segments. In the first half, net income fell 4% and non-GAAP EPS fell 2%. This is because the fiscal 2020 results include 2 pre-COVID quarters. In the second half of the year, the recovery is well underway, with fiscal 2021 results compared to the 2 quarters of fiscal 2020, with the most negative impact from COVID-19. As a result, net income in the second half was up 28% and non-GAAP EPS was up 43%.
reported better-than-expected fourth-quarter results, with net income up 29%. This was driven by strong domestic trends in the U.S., strong value-added services growth, and a faster-than-expected recovery in cross-border business volumes.
Free Cash Flow (FCF)
Visa's annual FCF (in billions) for fiscal years 2011-2021 was $3.52, $4.63, $2.55, $6.65, $6.17, $5.05, $8.61, $12.22, $12.03 , $9.70 and $8.71. Despite various headwinds, Visa's ability to consistently generate strong FCF is likely to continue in the future.
Visa--Financial Guidance
In the first three weeks of October, U.S. payment volumes were up 32% over 2019, debit cards were up 44% over 2019, and credit cards were up 22% over 2019. Transactions processed were 26% higher than in 2019. In constant U.S. dollars, cross-border volume excluding transactions within Europe was 94% of 2019, up 8 percentage points from the fourth quarter and 2 percentage points from September 2021.
Travel-related spending was up 4 percentage points from September compared to 2019 and is 65% of 2019 levels.Non-travel without a card was 49% higher than in 2019, up 6 points from the fourth quarter and down 2 points from September. On the fourth-quarter earnings call, management said that business has been recovering for the past 3 to 4 quarters. Globally, however, business has not returned to normal levels.
While cross-border travel is recovering, business in this area remains well below pre-COVID levels; the speed of recovery depends on the opening of borders. Assuming current trends continue into December, Visa expects net income to grow by a dozen times in the first quarter of 2022. Customer incentives are likely to be 26% to 27% of total revenue, the same as in the fourth quarter of 2021.
Visa - Dividends and Share Repurchases
On October 22, Visa's Board of Directors authorized an increase of the quarterly dividend of $0.32/share to $0.375/share, an increase of 17%. Visa has raised its dividend for 13 consecutive years, making the stock a dividend contender. The stock has posted double-digit dividend growth over the past decade, 20% in the past five years, and 21% in the past three years.
Share Repurchase
In January 2020, Visa's Board of Directors authorized a $9.5 billion stock repurchase program. In January 2021, it authorized an additional $8 billion share repurchase program. These authorizations have no expiration date. As of September 30, 2021, Visa had $4.7 billion remaining authorized for share repurchases.
The diluted weighted average number of shares outstanding has decreased from 2.88 billion in fiscal 2011 to 2.17 billion in the fourth quarter and 2.19 billion in fiscal 2021. During the fourth quarter, Visa Inc. purchased 13.2 million shares of Class A common stock at an average price of $231.33, valued at $3.053 billion. In fiscal 2021, Visa repurchased 39.7 million shares of its Class A common stock at an average price of $219.34.
Visa -- current valuation
From the valuation of Visa in the past 10 years, the diluted PE levels from FY2011 to FY2020 are 28.44, 42.11, 29.34, 30.42, 30.06, 31.46, 40.72, 29.85, 35.32 and 44.73 . The adjusted diluted EPS in fiscal 2021 is $5.91, which allows for an adjusted diluted PE of around 36, which is close to the 2019 valuation.
Visa -- Return on Invested Capital (ROIC %) The
ROIC% metric measures how well a company generates cash flow relative to the capital invested in its business. According to conventional wisdom, an annual return on investment of about 7% or more is considered a good performance for equity investing, which is the average annual return for the S&P 500 after adjusting for inflation.
For the quarter ended September 2021, Visa's annualized ROIC% was 22.49%. Based on trailing 12-month income statement data, as of November 25, 2021, Visa's weighted average cost of capital was 6.89% and its ROIC % was 19.34%; that is, Visa generated a much higher return on investment than was required to raise that investment cost of capital.
Visa -- Final Thoughts on Is It a Good Stock
At the beginning of this post, I stated that my preference is to invest in attractive/reasonably valued high quality companies and hold the stock for the long term. In my opinion, Visa and Mastercard fit all the boxes. I wouldn't be surprised if the U.S. stock market sees a sharp correction next year. In my opinion, it would be wise for investors to take a "risk off" investment stance.
As mentioned earlier, I think the new COVID-19 variant virus will cause some restrictions on domestic and international travel in the US. This could lead to pressure on Visa Inc. and Mastercard stock prices for the foreseeable future, and I think this weakness could be seen as an opportunity to build on dips.
Although Visa currently faces some headwinds, it has ample opportunities for growth.First, it also benefits as the prices of goods and services purchased with Visa rise. Second, it is actively taking steps to compete in the BNPL space. Third, investors can participate in the growth of cryptocurrencies without investing directly in cryptocurrencies. Fourth, the global economy is recovering, and the current valuations of Visa and Mastercard as beneficiary stocks are still close to 2019. In the end, invest in both companies, even if Visa loses its business to Mastercard and you benefit, and vice versa.
