Business Strategy & Outlook:
Visa is a somewhat unique company in that it is a longtime, established market leader that still enjoys strong growth prospects. Despite the ongoing evolution of the payments industry, a wide moat surrounds the business and that Visa’s position in the global electronic payment infrastructure is essentially unassailable. The shift toward electronic payments has driven Visa’s growth historically, and expected that to continue for the foreseeable future. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting this trend still has a lot of room to run. Emerging markets could offer a further spurt of growth even if growth in developed markets slows.
Visa’s position as the leading network makes it something of a tollbooth business, and the company is relatively agnostic to the smaller shifts within electronic payments, since it earns fees regardless of whether payment is credit, debit, or mobile. Visa is not without its issues in the near term, and its smaller peer, Mastercard, has been performing better over the past few years. Cross-border transactions, which are particularly lucrative for the networks, saw dramatic declines due to the coronavirus outbreak and a reduction in global travel. This headwind to endure for some time, but history suggests travel ultimately makes a full recovery following disruptive events and expect that to be the case again, although the process could take a few years. Visa obviously has sensitivity to the volume of consumer transactions, and the U.S. remains its largest market. A downturn in the economy would slow growth, and the fallout from the coronavirus has had a material impact, with both card networks seeing major declines in transaction volumes, although that pressure has started to reverse. However, there is no forecast of any long-term industry trends that will impede Visa’s ability to maintain its growth in the coming years, and the scalability of the business should still allow the company to modestly expand its already ample margins over time.
Financial Strengths:
Visa’s financial condition is solid. Historically, it’s been debt-free, but it issued $16 billion in debt before the Visa Europe acquisition in 2016, and has increased its debt level modestly since. Debt/EBITDA was 1.3 times at the end of fiscal 2021, a level that is viewed as very reasonable. Given the company’s relatively limited appetite for mergers or acquisitions and the asset-light nature of the business, and don’t see a compelling need for a lot of debt financing. Further, given the integral nature of Visa to the global payment infrastructure, don’t believe management would be eager to get too aggressive with its capital structure. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns. The current amount of leverage strikes a good balance.
Bulls Say:
- Visa has commanding market share in a scalable industry.
- There is still plenty of runway for growth in electronic payments, which surpassed cash payments on a global basis only a few years ago.
- The scalable nature of the business should allow Visa to improve its already impressive margins.
Company Description:
Visa is the largest payment processor in the world. In fiscal 2021, it processed over $10 trillion in purchase transactions. Visa operates in over 200 countries and processes transactions in over 160 currencies. Its systems are capable of processing over 65,000 transactions per second.
(Source: Morningstar)
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