(Disclaimer: Excel file attached below the post)
I think it is difficult to think of a company, or a business model, that has the capability to endure macro, micro and market turbulences and tribulations. The closest that a company comes to the above description is Visa (V). I understand that there are risks and exposures that Visa is prone to, but I still believe that Visa is fully equipped to swim through any curve balls that the markets might throw at it, albeit with slightly lower profits. Before I move on to the valuation and numbers, I would like to go over the industry and its outlook as well as Visa's history- since its IPO in 2008- and business and try to defend my claims with evidentiary documentation.
Global Payments Industry
The adage, "Cash is king" sounds more futile now than it ever did throughout the history of mankind. I am a huge movies and TV shows aficionado, and I remember witnessing cash thrown around in almost everything I watched. But, in the last decade or so, I have seen less and less cash transactions and more and more digital and electronic payments. It used to be that certain sectors of the economy, think small businesses such as food carts and your local corner delicatessens, only accepted cash as a viable payment for goods and services; but the transition has been so monumental that even the most remote operators in our economies have succumbed to the trends and have started accepting digital and electronic forms of payments. For instance, I got my car fixed two days ago, and believe it or not, I zelled the amount due; when was the last time a vendor, of any sort or size, asked you to transfer money into his/her bank account for services rendered?
The industry has changed dramatically and the advances are easily noticeable to any keen eye. Consumers and businesses have embraced electronic payments with full throttle, and it doesn't seem like it will change anytime soon, at least not in the near future. A simple transaction has transformed from just paying for goods into an entire journey embedded with value-added services and various solutions. The technological and proprietary advancements have propelled revenue growth, operating margins, and profits. According to BCG's report on global payments, high revenue growth and strong future potential has attracted and generated more than 5,000 fintechs into the payments atmosphere, and account for approximately $100 billion of the total industry revenues. According to the same report, total payment revenues grew at an annual rate of 8.3% to $1.6 trillion by the end of 2022, and is expected to grow to $2.2 trillion by the end of 2027. The industry as a whole has maintained decent shareholder gains, with the exception of fintechs/disruptors that have posted significantly higher shareholder gains over the last two years but have receded down to the industry norms as shown in the image below.
The industry is poised to maintain growth throughout the future, and with companies reinvesting more capital into the business, technological modernization such as the implementation of AI and AI driven software is only imminent. Where does Visa stand in all of this? Visa holds one of the most prominent, if not the most, positions in the industry. The company has posted solid revenues, operating income and margins since its IPO.
Visa: Trip Down the Memory Lane
Visa was founded in 1958 by Bank of America as the BankAmericancard credit card program. BofA then proceeded to licensing the program to other financial institutions in 1966. By 1970, BofA gave up control of the program, and as a result, formed a cooperative with various other banks. It was renamed Visa in 1976. If you are familiar with the company's history and how effectively the management, before and after the IPO, finessed its way through various hurdles such as the Durbin Amendment and plummeting of the stock as a result of the subprime mortgage crises to linking up JP Morgan and officially entering DJIA in 2013 as one of the 30 companies, then you'd know that throughout the years, Visa has never been cheap; it has always traded at a premium than the market and its competitors. Surprisingly, even after decades of existence, if one thinks about the corporate lifecycle, Visa is still posting double digits growth- from 74.5% in 2008 to 11.4% in 2023, with just as impressive operating margins, consistently hovering around 50-60% throughout its public history. Visa's growth, as stated above, is solely because of its business model; with every passing year, cash is loosing share to digital and electronic payments, consumers are leaning towards mobile and tap payments, and inflation is increasing the amount of money in circulation pushing more and more transaction volume to Visa's network.
IPO:
In February 2008, Visa announced its plan to go public, and consequently, the IPO took place in March of 2008. Some might have had thoughts about the IPO during the heat of the financial crises, Bear Stearns had just collapsed and S&P 500 index was down 9% for the year, but Visa still went ahead and decided to raise capital in the trepidatious market of '08. Visa's IPO was slightly different than the average IPO, in the sense that Visa was a cooperative going public as compared to a privately owned company issuing shares to the public. At the time of of its offering, many a analysts thought that the banks were trying dump Visa at a time when markets were in turmoil and banks were looking to preserve capital for the cobblestone road ahead. But, against all odds, the IPO ended up being extremely lucrative for investors; Visa's market cap at the time of IPO was around $39 billion, and 17 years later, the value is north of $400 billion. Company issued 406 million class A shares at a price of $44 (higher than the forecasted range of $37-$42), raising $17.9 billion through the offering, etching its name in the history books. To really understand its growth and journey since its IPO, I looked at Visa's share price for each month since its IPO:
Visa's growth and profitability could largely be attributed to its business model- Visa is not a bank, it does not issue cards or take deposit and make loans- but also partially to the management's capability to curb competition and regulation. Payments industry has seen plenty of new entrants (upstarts and fintechs) but they, at best, have only been able to smell the pie, not eat it. Visa and Mastercard have kept their dominance intact throughout the years. There was a time, not long in the past, when companies and groups of merchants endeavored to create their own network to rival Visa's VisaNet , but ultimately came to their senses and realized that it would be much better for their top and bottom lines to pay for a service rather than spending an exorbitant amount of money to create a network and then incentivize its usage and implementation. Big telecommunications companies also took a shot but then ended up partnering with Visa instead. The company, it seems, is very well acquainted with its market and any and all rising or existing threats- a welcoming treat that a lot of managers and companies simply do not possess.
Visa's competition does not only stem from fintechs and start-ups, but also from companies with long standing histories such as Mastercard (MA), American Express (AXP), Discover Financial Services (DFS) and PayPal (PYPL),with AXP tracing its history back to1977. If we assess all of the companies by their share price (listed below), they have all witnessed ginormous growth in their price (with the exception of PayPal which has giveth and taketh), so what sets Visa apart? What sets the company apart is its global presence, its brand name, experienced management, and the company's laser focus on innovation and technology.
- Service revenues: These are earned for services provided in support of client usage of Visa payment service.
- Data processing revenues: These are revenues earned for authorization, clearing, settlement; value added services related to issuing, acceptance, and risk and identify solutions; network access; and other maintenance and support services that facilitate transaction and information processing among clients.
- International transactional revenues: These are revenues earned for cross-border transaction processing and currency conversion activities.
- Other revenues: These revenues consist mainly of value added services related to advisory, marketing, and certain card benefits; license fees for use of the Visa brand or technology; and fees for account holder services, certification and licensing.
- Client incentives: These are not cash inflows but rather what Visa pays financial institution clients, merchants, and other business partners to grow payments volume.
- Services revenues: I believe that the company is very well situated and will continue to increase its market share and as a result I expect services revenues to grow from 11% in 2023 to 15% in 2033.
- Date processing revenues: I expect revenues for this segment to gradually increase from 10.9% in 2023 to 12.8% by 2022.
- International transaction revenues: Given the incremental need of various countries to develop their own local payment processing systems and networks in the future, I expect the revenues from this segment to decrease from 18% in 2023 to 12.6% in the next 10 years.
- Other revenues: Other revenues consist mainly of value-added services coupled with other revenue streams that don't really fall into any of the other categories. I expect this segment to witness a modest decline from 24.5% to about 20% in 2033.
- Client incentives: Given the growing competition, both domestic and abroad, I expect that the company will have to keep investing to incentivize its platform over its competitors and so as a result, I expect client incentives to remain modestly flat- 19.4% in 2023 to 18% in 2033.
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