Visa (NYSE:NYSE:V) is the dominant card payment provider with 53.9% of US credit card purchase volume, going through the Visa Network. In countries such as the U.K, 80% of cards issued are by Visa. The company has one ofthe most stable share price charts I have ever seen (Beta of 0.92), which is testament to the dominance of the company and the stable cash flows it generates. Recently, the share price has experienced some volatility with the stock price pulling back by 13%. In this post I'm going to dive into the dominant business model, growing financials and valuation. Let's dive in.
Visa share price(Y charts)
Dominant Business Model
Visa’s roots go back to 1958 when Bank of America issued a credit card program called “BankAmericard” in response to their competitor Master Charge (now Mastercard). In 1976, Bank of America spun off control to issuer banks and the company was renamed Visa. Today the company still dominates the global cardpaymentmarket with over a 50% market share, this makes it the largest provider outside of China (UnionPay).
Visa Market share(SEC data)
Visa’s network operates via four secure data centers in Virginia, Colorado, London and Singapore. These facilities are secured against natural disasters, terrorism and much more. Visa generates it’s revenue by placing themselves in the prime position between the consumers bank and the merchants bank. In the image below you can see this process in action for a peer to peer payment. The recipient's bank could also be replaced with a “merchant bank”.
Visa Payment method(emerchantpay)
The three processes Visa manages are “Authorization” checking the account details are correct and enough funds are available, “Clearing” and “Settlement”. Visa takes approximately 1.15% to 2.40% of every transaction via their network. This was the ultimate business model as their network was like a toll road, it cost a lot to build upfront and thus had high barriers to entry. They were then in prime position to take a fee for every transaction. Now you may notice I’m using the past tense “was”. This is because thanks to advanced technology like online payment systems and even blockchain, a multitude of “Fintech” competitors have entered the market. However, where some incumbent banks have lost their edge, Visa has partnered with the major players or created their own new technology. For example, when Google Pay was released in 2011 and Apple Pay in 2014, and these apps enabled payment via phone and thus cards would not be needed. However, Visa partnered with these tech giants to enable payment via a “virtual” visa card.
Blockchain and crypto technology also has the ability to disinter-mediate Visa from the payment system, as “decentralized” networks can effectively remove the middle man. However, Visa has embraced the technology rather than trying to fight it. They have introduced “Crypto Solutions” which has over 50+ wallet partners. This includes major players such as Coinbase, which allowscrypto paymentvia a Visa Debit card.
Visa Crypto card((Coinbase/Verge))
Visa has introduced Stablecoin payouts, they are creating a native crypto currency and have even released Crypto API, which will allow developers to build applications on top of the Visa network. The company also offers acrypto advisory servicesas a way to help its partners evaluate potential opportunities in the space.
The company is also moving into the NFT market, by launching aprogramto help entrepreneurs grow their business via non-fungible tokens. Visa even purchased a crypto punk for $150,000 in order to “get a first hand understanding” of the NFT infrastructure.
Growing Financials
Visa generated $25.5 billion in revenue during the trailing 12 months, up a substantial 16% from $21.8 billion in 2020.
Visa Revenue(Created by author)
Gross Profit has jumped from $17 billion in 2020, to $20.3 billion over the same period up 17%. While operation profits have jumped by 20% from $14 billion to $16.8 billion. These are incredible growth numbers given this is a legacy payments provider, with a market cap of $446 billion. Visa has had exceptional "software" style margins for decades.
Visa Margins(created by author)
The company could also be a super dividend play for the future, as over the past 5 years they have growndividendsat an 18% CAGR. With substantial cash flow and a strong balance sheet there is no reason why the company couldn’t continue this trend, which could lead to a double digit dividend yield in the future.
Visa Dividend(Created by author)
Visa has also bought back a staggering $3.1 billion worth of shares in Q42021 and directors haveapproveda new $12 billion share buyback program.
Visa Buybacks(created by author)
Valuation
In order to estimate the intrinsic value of Visa, I have plugged the latest financial data into my discounted cash flow model.
Visa stock valuation(Created by author Ben at Motivation 2 invest)
I have given the company very optimistic revenue growth projections of 15% for the next 5 years, which is the top end of analyst estimates. In addition, I have predicted the operating margin to maintain stable at 16.28%.
Visa Stock valuation(created by author Ben at Motivation 2 Invest)
Given these projections, I get a fair value of $157 per share which means the stock is at least 34% overvalued.
Relative to their Fin-tech peers, Visa has a forward PE ratio of 25 which is cheaper than their main competitor Mastercard (PE = 28). However, more expensive than Paypal and even "growth stocks" such as Coinbase.
Visa Valuation(created by author)
The company's EV to EBITDA (forward) multiple also shows the same story with lower valuation compared to Mastercard but higher than others.
Visa Valuation(created by author)
Risks
Valuation
Despite the stock price pulling back by 18% from it's highs Visa is still not cheap both intrinsically and relatively even with optimistic growth projections.
Competition
If Visa had stood still while new Fintech company's emerged, we would see a very different company today. However, their management has been smart, savvy, and pivoted the company into new trends and partnerships in order to keep their moat strong. They are still on top, but in the world of crypto and blockchain theoretically no "middle man" is required, so this could be a risk in the future.
Final Thoughts
Visa is an incredible company which still dominates the market share for payments. They have been growing revenues and profits exceptionally well, and their dividend growth could lead to a healthy yield in the future. The valuation is the major issue with the company as the market seems to be pricing in the company’s dominant market position and competitive moat, which they have expanded with crypto partnerships. I suspect the company’s substantial buyback program will keep increasing the earnings per share and put positive pressure on the stock price. As a prior shareholder of Visa, I purchase a substantial number of shares when the price plummeted in 2020 and doubled my money on that investment but selling out near the top. Opportunities like those of a global catastrophe seem the perfect times to load up on positions in this stock, as Visa payments are accepted everywhere and "for everything else, there's Mastercard".
Author: Ben Alaimo
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