Yahoo Finance Is Visa Inc. a Buy?
Over the past 10 years, Visa Inc. (NYSE: V) has crushed the market, returning more than 500% while the S&P 500 index has returned "only" about 100% during that same time frame. Of course, Visa's shares now sport a P/E ratio of about 33 based on adjusted earnings, a valuation multiple seemingly more fit for a young growth stock than a mature credit card network. Does Visa deserve this valuation, and given the company's rapid rise over the past decade, can shareholders expect any meaningful returns over the next 10 years? Let's take a closer look at Visa to determine if investors would do well to buy shares or stay away.
Visa's business model and recent performance
Let's first review how Visa makes money, since a bit of confusion exists on this matter. Every time a Visa account is used to facilitate a transaction, the company collects small fees based on the size of the purchase or payment and even tinier fees to authorize, settle, and clear the transactions conducted across its network. A simple way of thinking about it is that Visa receives revenue for both the dollar amount travelling over its networks and the number of transactions it facilitates.
Visa has crushed the market over the past decade, but several catalysts still exist that could propel its stock price higher. Image source: Getty Images.
As with Mastercard Inc. (NYSE: MA), Visa doesn't directly lend money to consumers through its branded credit or debit cards. The money being borrowed comes from the financial institution that actually issues the card, such as JPMorgan Chase or Capital One. There are advantages and disadvantages to this model. The primary advantage is that Visa is not at risk from consumers defaulting on their credit card loans, which is one of the riskiest types of debt. The disadvantage is that consumers pay a lot of interest on their credit card debt each year, and Visa doesn't get to collect any of it.
Historically this model has served Visa incredibly well and, it bears noting, Visa shows no signs of slowing down. In the company's most recent quarter, net revenue rose to $5.1 billion, a 13% increase year over year, and adjusted earnings per share grew to $1.11, a 30% increase over the same period. This strong performance was driven by a 15% increase in payment volume and a 12% increase in processed transactions. Several catalysts are behind these robust growth numbers, including the rise of e-commerce and the digitization of transactions in foreign markets.
The rise of e-commerce
In 2018's first quarter, e-commerce sales in the U.S. increased 16.4% year over year while total domestic retail sales increased just 4.5% year over year, according to the U.S. Census Bureau. Of course, it doesn't take a government agency to tell us what we all observe every day: More and more commerce is moving from the physical world to the digital.
What does this have to do with Visa? At the 2017 UBS Global Technology Conference, transcribed by S&P Global Market Intelligence, Visa CFO Vasant Prabhu stated the company was at an inflection and that e-commerce had the potential to drive explosive growth for the company:
[B]roadly defined the entire digitization of cash phenomenon driven by e-commerce. Simple numbers. E-commerce is growing 5x as fast as face-to-face transactions. And in an e-commerce transaction, the propensity to use a Visa card is twice as high as a face-to-face transaction. So something growing 5x as fast where your propensity to be used is twice what it might have been. That's phenomenal.
Visa's international success
This past quarter, Visa showed its strongest growth overseas, where the vast majority of transactions are still settled in cash. In international markets, the company's payment volume increased 19%, almost twice as high as its domestic payment volume growth. Visa's international transaction revenue also rose 19% to $1.75 billion.
While Visa announced a number of new deals in its second-quarter conference call with international merchants and financial institutions, its greatest success in recent quarters has come in India. CEO Al Kelly said that in that country of 1.4 billion people, Visa has about a 50% market share of both credit and debit cards. Since the end of 2016, the number of merchants able to accept cards at the point of sale has doubled to 3 million. One of the keys to this increase in merchant acceptance points has been the use of QR codes, which allows sellers to accept card payments with nothing more than a smartphone, removing the need for the retailers to buy expensive hardware or have access to a landline. Kelly said about 450,000 merchants now use this technology in India.
Is Visa a buy?
There's no doubt that Visa's valuation is high, but any company with this type of strong earnings growth and the number of possible catalysts in its near and long-term future is not going to come cheap. By its very nature, e-commerce encourages forms of digital payments, like Visa, over other methods such as cash or checks. In developing economies, processing cards is just now becoming possible thanks to the wonders of mobile connectivity, which makes digital payments accessible and affordable for merchants and consumers alike. As Warren Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Investors looking for a wonderful company at a fair price need look no further than Visa.
More From The Motley Fool
Matthew Cochrane owns shares of JPMorgan Chase and Mastercard. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool owns shares of Visa. The Motley Fool has a disclosure policy.
