Investment Overview - $Visa(V)$  

Core business to benefit from migration to digital payments. 30% of global payments are still transacted in cash as per Bloomberg intelligence, which translates to an estimated $18tn opportunity. The shift from cash and checks to electronic payments will act as a key long-term driver of Visa's core business. Growing e-commerce penetration is also a tailwind for Visa owing to higher interchange fees in card-not-present transactions and cross border payments that have higher fees for foreign exchange services. Moreover, in the near to mid-term, consensus estimates show that international transaction revenues are poised to grow 47%/17% in FY22/FY23 which should boost top and bottom lines as global travel recovery is underway.

Visa's Network of Networks strategy amounts to a $185t opportunity in new flows between individuals, businesses, and governments. This is more than 10x the cash and check opportunity in consumer payments. As per Visa's 2020 Investor Day, Visa's penetration was below 1% in these new flows. Visa Direct, a global platform for real time payments enables Visa to go beyond consumer to business (C2B) into new use cases such as peer to peer (P2P), business to consumer (B2C), business to business (B2B), and Government to Consumer (G2C). Moreover, Visa's Value-Added Services which aid with revenue diversification and differentiation also add more value to transactions, increasing yields.

According to the Nilson Report, Visa had the largest global market share of 39% compared to Mastercard's 24% and Unionpay's 34% in 2021. Visa is the largest player in a lucrative oligopoly, and it reaps powerful network effects owning to the vast number of merchants and cardholders that it serves. In FY21, Visa's total payments and cash volume amounted to $13 trillion which connected 3.7 billion credentials to more than 80 million merchants. In its two-sided platform business model, every cardholder or merchant that comes onboard with Visa creates incremental value for the other party, which in turn deters incumbents by creating high barriers to entry. Consequently, Visa enjoys high net margins in excess of 50% which are significantly higher than the vast majority of businesses.

Hence, Visa's longer term outlook seems to be a bullish one, based on 29x FY23F PER based on its last 5-years average and at a 10% discount to target multiple of 32x PE for Mastercard. Consensus expects Visa's EPS to grow at a CAGR of 14% between FY22-FY25, lower than Mastercard's earnings CAGR of 24% owing to Visa's larger scale. Given Visa's dominating position in the payments space and its outstanding net margins above 50%, its current valuation of 23x FY23F PER (at US$179 per share) looks quite attractive. Long term structural trends towards digital payments will be a key driver for Visa.

Risks

Operating in an oligopoly, Visa's dominance and its network fees have been under regulatory scrutiny. Any change in laws that affect payment networks such as Visa could potentially lead to significant losses in earnings.

If consumer spending habits are significantly altered due to a recession or market expectations of a recession, the core business may be hampered by lower volume fees.

The growth in BNPL penetration rates could pose a risk to credit as consumers substitute credit card transactions with BNPL. The BNPL penetration has increased from 27% to 30% between 2020 and 2021. A McKinsey consumer study shows that 39% of survey participants would have used a credit card for their purchases if BNPL did not exist. Nonetheless, Visa has developed its own BNPL product as a hedge.