Visa: Getting Closer To Its Intrinsic Value

Seeking Alpha2021-10-11

Summary Visa reported impressive growth rates in the last quarter, but the same quarter last year was one of the worst for Visa. While COVID-19 impacted Visa negatively in the short term, it might ...

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精彩评论

GinC
2021-10-12
GinC
Travel season begins!!!
Jennifer58
2021-10-11
Jennifer58
Go go go
- Investigater:
  Buy buy buy
- Jennifer58:
  Lol
Chuah_S
2021-10-11
Chuah_S
Wow
- Nevstar:
  like [财迷]

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But both stocks appeared overvalued for the most time in the last few years and so far, I did not invest in either of the two businesses. However, I am keeping a close eye on both stocks as they are taking one of the top spots in my personal watchlist.\nIn the following article, we will look at the quarterly results in which Visa could report growth for the first time since the second quarter of fiscal 2020. Additionally, we are looking at positive trends for Visa as well as risks and competitors the company is facing. And finally, I will provide another intrinsic value calculation.\nQuarterly Results\nAfter Visa had to report declining revenue and earnings per share (year-over-year comparison) in the previous four quarters, the company could now report strong growth rates in the third quarter of fiscal 2021. Of course, we are comparing the results to one of the worst quarters in recent history – those months in which COVID-19 hit the world and several countries imposed lockdowns in different forms.\nSource: Visa Q3/21 Investor Presentation\nIn Q3/21, Visa generated $6,130 million in revenue and compared to $4,837 million in the same quarter last year, this is an increase of 26.7% YoY. Operating income increased from $2,999 million in the same quarter last year to $4,064 million this quarter reflecting an increase of 35.5% YoY. And while we are seeing impressive growth rates for revenue and operating income, earnings per share increased “only” from $1.07 in the same quarter last year to $1.18 this quarter – an increase of 10.3% YoY.\nWe can also compare the results of Q3/21 to the results of Q3/19 as the third quarter in fiscal 2020 was kind of an outlier.\n\nWhen looking at the different segments, we can see especially “International Transaction Revenues” growing at a high pace (54% YoY growth), which is not surprising as this segment was hit the hardest by COVID-19. And while gross revenue increased 30%, client incentives increased even 41% which led to a net revenue growth of “only” 27%.\nSource: Visa Q3/21 Investor Presentation\nPast Performance\nWhen looking not only at the last quarter, but at longer timeframes, we also see strong growth rates for Visa (with only few exceptions). We only have data since 2008 although Visa is much older (the company did not go public before 2008). But we see strong growth rates during that time and Visa could grow its earnings per share with a CAGR of 28.15% between 2008 and 2020. When looking at the 5-year CAGR, Visa could still report growth rates between 15% and 20% in the last few years.\nSource: Author's work\nAnd Visa clearly outperformed the S&P 500 (SPY) in the last few years. But not only Visa and Mastercard are outperforming the rest of the stock market, the entire payments sector clearly outperformed the S&P 500. It also outperformed other sectors like “asset management”, “retail banking” as well as “corporate and investment banking”. When looking at the total shareholder return, the payments sector grew with a CAGR of 25% in the years between 2009 and 2021 – clearly outperforming the other three sectors.\nSource: The 2020 McKinsey Global Payment Report\nPositive Trends\nVisa outperforming in the last decade is clearly a good sign that we are dealing with a high-quality company, but the question is, if Visa can continue to grow at a high pace in the years to come. And the last few quarters, Visa struggled due to COVID-19 and when looking at the results and operational metrics, we saw a negative trend especially in 2020. In fiscal 2020, revenue declined from $22,977 million to $21,846 million (a decline of 4.9% year-over-year) while Visa was able to grow with an extremely high pace in the past. Earnings per share also declined from $5.32 in fiscal 2019 to $4.89 in fiscal 2020 – a decline of 8.1% YoY.\nSource: Visa Q3/21 Investor Presentation\nAnd when looking at the U.S. Payment volume for example, we also see the business suffering during 2020 – especially “card present” saw steep declines, which is not surprising in times of lockdowns and without people traveling. And it is also not surprising that “card present” is now showing the highest growth rates compared to the year before.\nSource: Visa Q3/21 Investor Presentation\nAnd when looking at processed transactions for example, we can see a constant improvement in the weeks of April till July 2021 and the processed transactions being about 20% higher than in fiscal 2019.\nVisa is constantly improving, but we can’t deny that in the short-run, the COVID-19 pandemic had a negative effect on Visa’s business. However, over the long run, the pandemic could have been a huge tailwind for Visa (and similar businesses). Not only did the percentage of people paying with cash decrease, but many businesses were also forced to accept payments per card as people did not want to use cash anymore. In Germany for example, I can now pay with my Mastercard in almost any bakery - before COVID-19, people would have laughed at me if I asked in a small bakery if I can pay with my Mastercard.\nMcKinsey is showing that the cash usage declined in most mature markets during the last ten years and especially in countries like the Netherlands (from 52% of people using cash in 2010 to only 14% in 2020) or in Sweden (from 56% to only 9%) almost nobody is using cash anymore, which is good for companies like Visa as people need other forms of payment – and credit cards are one way.\nSource: The 2020 McKinsey Global Payment Report\nThe authors of the McKinsey study assume that COVID-19 will lead to a further decline in cash usage in the years to come and that the pandemic might have changed the buying behavior in a dramatic and lasting way:\n\n Overall, in retail, the impact was not a decline but a shift in buying behavior. In the first six months of the year, consumers spent $347 billion online with US retailers, up 30 percent from the same period in 2019—corresponding to six times the annualized 2019 growth rate of online retail. Amazon’s second- quarter 2020 numbers recorded 40 percent year-over-year growth, boosted in particular by the tripling of grocery sales. In Europe, differences in shopping behavior between geographies were strongly reduced and differences between age groups eroded as many consumers (in particular, older shoppers) turned to online shopping for the first time.\n\nAnd Visa and Mastercard will profit from two shifts. Both companies will profit from customers, which are buying in traditional brick-and-mortar stores but using credit cards instead of cash. And Visa and Mastercard will also profit from customers shopping online as one way to pay is by using Visa/Mastercard. And not only are emerging markets offering growth potential as in countries like Mexico (86%), Indonesia (96%), Argentina (87%) or Brazil (74%) a high percentage of people are still paying with cash. In developed markets like Japan (54%), Korea (34%), Singapore (39%) or the United States (28%) a huge part of the population is also still using cash – giving Visa still room to grow.\nCompetition\nIn theory, Visa could profit from more and more people not using cash anymore. But aside from competitor Mastercard, there are several other companies that could profit from that trend and credit cards issued by Visa or Mastercard are not the only way how people can pay.\nOne method to pay without cash is by using digital/mobile wallets – like Apple Pay (AAPL) or Google Pay (GOOG)(NASDAQ:GOOGL). But right now, Apple Pay is not a challenge to Visa. As long as Apple Pay still needs a credit card (like a Visa credit card), this is not a huge threat. However, the threat would emerge if Apple were to come up with its own payment network and Apple Pay would not need a credit card from Mastercard or Visa anymore. For 2025,analysts estimate that Apple Pay could account for 10% of all card transactions. And then it is also not a problem that digital/mobile wallets are already the dominant e-com payment method (about 45% market share) and will gain market share in the next few years.\n\nOne of the competitors is PayPal (PYPL) and Visa must take that company seriously.In my last article about PayPalI already talked a bit about the competition between Visa and Mastercard on the one side and PayPal on the other side. In the article I pointed out that neither the number of cardholders/accounts nor the TPV of PayPal is anywhere close to Visa. While Visa has almost 3.5 billion cardholders, PayPal has only slightly above 400 million accounts. And the total process volume of PayPal was $937 billion while Visa’s TPV is $8,941 billion. And Visa’s operating margin (64.6%) is much higher than PayPal’s operating margin (17.7%). Nevertheless, PayPal is already generating more revenue than Visa and is already generating billions in free cash flow. It would certainly be a huge mistake for Visa to underestimate PayPal.\nAnd when talking about competition and risks for “classical” payment methods, we must mention cryptocurrencies as many people see it as a serious threat. I personally don’t see Bitcoin (or any other cryptocurrency) ever replacing today’s payment methods (cash, credit cards) in a meaningful way. And if it should happen that cryptocurrencies will replace today’s payment methods (and currencies) it will take decades. I still consider Bitcoin a long-lasting hype that will vanish again at some point in the future. When talking about risks for Visa,the following article is also mentioning some aspects and worth reading.\nIntrinsic Value Calculation\nAnother “risk” for Visa are the high valuation multiples the stock has been trading for in the last few years (with some brief exceptions). The stock is trading for a P/E ratio of almost 45 and a forward P/E ratio of 39.55 right now. And Visa is now trading for 39.5 times free cash flow, which is in line with the average P/FCF ratio of the last 10 years.\nData by YCharts\nA high pace, which should justify a higher valuation multiple for Visa compared to many other companies. I have pointed out several times that P/E ratios as well as P/FCF ratios might give us hints about the valuation of a stock, but as they are ignoring the growth potential of a business, a discounted cash flow calculation is usually the better way to determine an intrinsic value.\nIn my last article about Visa, I calculated the intrinsic value in two different scenarios – a less optimistic scenario, which led to an intrinsic value of $151.21 and a more optimistic one, which led to an intrinsic value of $174.20. In this article, I want to provide an update for my intrinsic value calculation.\nAs basis, we either can take the free cash flow of the last fiscal year ($9,704 million) or the free cash flow of the last four quarters ($12,687 million). Let’s be optimistic and take the free cash flow of the last four quarter as basis and for the next ten years, we assume that Visa can grow 11% annually (the same growth assumption as I used in my more optimistic scenario in the last article). Considering that Visa can still report EPS growth rates in the high teens, 11% growth seems realistic (with a reasonable margin of safety). For perpetuity, we assume once again 6% growth (as we always do when talking about companies with a wide economic moat). When using these assumptions (and 2,184 million in diluted outstanding shares as well as a discount rate of 10%), we get an intrinsic value of $206.84.\nConclusion\nVisa is still a bit overvalued in my opinion, but it is trading closer to its intrinsic value than 10 months ago, when my last article was published. And we can also make the case that Visa can grow even at a higher pace in the years to come (maybe 12% or 13%) and this would make the stock fairly valued. And when assuming that the declining cash usage will be an additional driver for growth, it seems not unlikely that Visa will grow at a higher pace than 11% in the years to come.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":826144108,"gmtCreate":1633999644445,"gmtModify":1633999699449,"author":{"id":"3567228558278395","authorId":"3567228558278395","name":"GinC","avatar":"https://static.tigerbbs.com/e4cc69cd9347bbc54a06cbaf34fc2745","vip":1,"crmLevel":3,"crmLevelSwitch":0,"authorIdStr":"3567228558278395","idStr":"3567228558278395"},"htmlText":"Travel season begins!!!","listText":"Travel season begins!!!","text":"Travel season begins!!!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/826144108","repostId":1134101513,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":826081742,"gmtCreate":1633958985835,"gmtModify":1633958985932,"author":{"id":"3577529300728738","authorId":"3577529300728738","name":"Jennifer58","avatar":"https://static.tigerbbs.com/9a014efda004b6cc112e5d7968adf52f","vip":1,"crmLevel":4,"crmLevelSwitch":0,"authorIdStr":"3577529300728738","idStr":"3577529300728738"},"htmlText":"Go go go","listText":"Go go go","text":"Go go go","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":2,"repostSize":0,"link":"https://laohu8.com/post/826081742","repostId":1134101513,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6163293,"gmtCreate":1633959378184,"gmtModify":1634716094441,"authorId":3571011001777364,"author":{"id":3571011001777364,"idStr":"3571011001777364","authorId":3571011001777364,"name":"Investigater","avatar":"https://static.tigerbbs.com/6cc9755a32715757af2686d3467dc2be","vip":1,"crmLevel":5,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":826081742,"type":1,"supId":0,"prevId":0,"content":"Buy buy buy","text":"Buy buy buy","html":"Buy buy buy"},{"id":6163298,"gmtCreate":1633959387368,"gmtModify":1634716094113,"authorId":3577529300728738,"author":{"id":3577529300728738,"idStr":"3577529300728738","authorId":3577529300728738,"name":"Jennifer58","avatar":"https://static.tigerbbs.com/9a014efda004b6cc112e5d7968adf52f","vip":1,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":826081742,"type":1,"supId":6163293,"prevId":0,"content":"<u>Lol</u>","text":"<u>Lol</u>","html":"<u>Lol</u>"}],"langContent":"CN"},{"id":826011570,"gmtCreate":1633957887641,"gmtModify":1633957887641,"author":{"id":"3577144861005942","authorId":"3577144861005942","name":"Chuah_S","avatar":"https://static.tigerbbs.com/998d1189054c3b22fa7f718f6147782d","vip":1,"crmLevel":1,"crmLevelSwitch":0,"authorIdStr":"3577144861005942","idStr":"3577144861005942"},"htmlText":"Wow","listText":"Wow","text":"Wow","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/826011570","repostId":1134101513,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6163196,"gmtCreate":1633958841217,"gmtModify":1634716102402,"authorId":3582459988054864,"author":{"id":3582459988054864,"idStr":"3582459988054864","authorId":3582459988054864,"name":"Nevstar","avatar":"https://static.tigerbbs.com/c898e737b1498464bc1186d62dba484b","vip":1,"crmLevel":3,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":826011570,"type":1,"supId":0,"prevId":0,"content":"like [财迷]","text":"like [财迷]","html":"like [财迷]"}],"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":20,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1134101513"}