Author | the value corner
Compile |A big Wall Street event
Visa (NYSE:V) is an American payment processing and fintech company that dominates the competition with its main competitor, Mastercard, as a market leader. The Company specializes in electronic payment solutions and operates a proprietary payment network to process transactions executed by its customers. When customers use Visa's payment network, the company charges a transaction processing fee. As a result, Visa is sometimes referred to as a digital payment "toll booth" operator, and the company is able to generate revenue from most card and** payments worldwide.
The rapid diversification of their payment solutions, into emerging business areas such as instant payments, and geographic areas where digital payment networks are underdeveloped, could allow Visa to continue to deliver real growth over the next decade.
The company recently announced its first-quarter financial results, highlighting solid growth in net income, net profit, earnings per share, payment volume, cross-border transaction volume, and processed transactions for the first quarter of 2024.
Net revenue increased to 86., driven by growth in services, data processing, and international transaction revenue$300 million, up 9% in nominal and constant dollar terms. While this growth remains solid, it still lags behind the top 12% in 2020, suggesting that even Visa is not completely immune to the weaker business environment.
Payments volume grew 8%, excluding a 16% increase in intra-European cross-border transactions, reflecting a recovery in e-commerce spending. Solid growth in cross-border payments volume was one of Visa's key revenue drivers in the first quarter. There was also a significant 9% increase in the number of transactions processed, reaching a total of 57.5 billion transactions. This is driven by the growth of debit and credit card usage, as well as digital wallets. While the weak economic environment in the U.S. has put particularly hard pressure on low-income earners, the continued resilience of consumers is quite encouraging.
Visa's operating expenses for the first quarter of 2024 were only 26$800 million, down 5% year-over-year. While it is true that staff, network, and processing expenses have increased year-over-year, small changes indicate how efficiently the company manages its expense profile.
Believing that Visa's ongoing cost management efforts are very positive can be seen and underscored by the company's commitment to maintaining high margins and a lean business.
Given that this cost control has been achieved as Visa expands its product offering with new and innovative solutions, analysts are very pleased with this progress.
Visa's operating income totaled $5.9 billion, up 13% year-over-year, reflecting higher revenue and lower operating expenses in the company's first quarter. The company's operating margin then improved to 65% from 62% in the year-ago quarter. This is indeed a huge operating profit, especially compared to Mastercard's current OM which is only 55%.
Net profit also increased significantly by 17% year-over-year to $4.9 billion. This was primarily due to revenue growth and expanded operating margins, as well as a slightly lower effective tax rate in the first quarter.
The company also rewarded shareholders during the quarter by repurchasing 14 million shares**, while also distributing 0. per share$52 quarterly dividend.
Overall, Visa performed quite well in the first quarter of 2024. Visa continues to demonstrate the company's ability to leverage its core payments network and increasingly diversified revenue streams to deliver continued strong growth in a challenging and dynamic environment. The company's focus on expanding its reach, enhancing its service capabilities, and creating value for its stakeholders has set it up for future success in the digital payments industry.
Visa also had some big quality wins in the first quarter, with the company acquiring a majority stake in Prosa, Mexico's leading payment processor, and fully acquiring the cloud-native issuance processor and core banking platform Pismo.
The company's continued expansion into emerging markets and its ongoing efforts to expand the capabilities of its payment solutions show how focused the company is on maintaining its leading position in the global payments business.
Visa's current price-to-earnings (GAAP) TTM ratio is 3192 times, which is actually a 5% drop from its 10-year average. While the 5-year ratio certainly includes a period in a near-zero interest rate environment, it's still a good thing to see Visa's P/E ratio drop significantly from a high of around 38x. Visa's success in 2023 has helped lower the P/E ratio, and the apparent sell-off is not a fortuitous factor that contributed to the P/E decline.
Visa has a P CF ratio TTM of 2757 times, with an EV sales TTM of 1681 times. These two relatively high ratios indicate that Visa's marketplace pricing is still growing significantly.
In absolute terms, Visa has slightly outperformed the popular S&P 500 tracking index** Spy (SPY). The volatility of this ** is also quite low, with a beta of 095 times.
While Visa's outstanding financial results guarantee 5 years of results, I would like to highlight the tremendous ** that has occurred over the past three months.
The ** comes on the heels of a weaker U.S. economic environment and a slight slowdown in Visa's earnings growth. Considering the lack of historical earnings, I think the recent stock price** may be a bit unreasonable.
By utilizing The Value Corner's intrinsic valuation calculations, we can better understand what value exists in a company from a more objective perspective.
Let's start with the base case valuation, using Visa's current share price of 277$18, with a conservative 2024 EPS estimate of 9$92 with a realistic "r" value of 012 (12%), the current Moody's experienced AAA corporate bond yield is 474 times, I came up with a base case iv of 299$30. This only means that the value is undervalued by 8%.
When using a more pessimistic CAGR r-value of 009 (9%) to reflect the worst-case scenario, where Visa struggles to achieve top- and bottom-line growth due to a slowdown in corporate and consumer spending due to the U.S. recession,** is valued at approximately $244, which equates to a 14% overvaluation of the stock price.
This pessimistic scenario illustrates the extent to which Visa's share price has grown and highlights the true dependence of the current share price on future growth.
Taking into account valuation metrics, absolute valuations, and intrinsic value calculations, I believe that Visa's **valuation is somewhere between a slight undervaluation and a fundamentally fair valuation.
In the short term (3-12 months), there are a number of possibilities for the direction of Visa's share price. While the solid growth outlook remains in favor of the company, any negative short-term catalysts could lead to a sudden share price, especially given that the current growth has already been priced in.
In the long term (2-10 years), Visa will continue to dominate the digital payments market. I like their basic business model, their potential profitability, and the company's expansion into the area of value-added services.
Today, despite the maturing markets of North America and Europe, Visa has a number of tangible opportunities to continue to grow its revenues and profits in a tangible way.
Visa still faces some competitive risks from major industry competitors, as well as real ESG threats from regulatory changes and cybersecurity issues. The company operates in a dynamic and evolving market, where consumer preferences, technological innovations, and competitive forces may impact its growth and profitability. Visa must constantly adapt to the changing needs and expectations of customers, merchants, and partners, and offer new and improved products and services that enhance the value and convenience of its network.
Visa also faces stiff competition from other payment networks, such as MasterCard, American Express, and Discover, as well as stiff competition from digitally native players such as PayPal, Square, Stripe, Alipay, and more. Visa must constantly innovate to differentiate itself from its competitors to ensure it doesn't fall behind for long.
The company also faces a real ESG threat from a complex and ever-changing regulatory environment. Quite simply, there are a plethora of laws and regulations that may affect Visa's pricing, fees, exchange rates, data protection, privacy, and consumer protection procedures. Visa may face fines, penalties, lawsuits, or reputational damage if it fails to comply with applicable rules or is involved in any legal dispute or investigation.
In addition, as a digital payment network, Visa is exposed to a variety of cybersecurity and fraud risks that could harm its data, systems, and reputation. Visa must continually invest in security measures and technology to prevent, detect and respond to cyberattacks and fraudulent activity.
Despite these real ESG threats, I believe Visa will remain a credible ESG-aware investment option as they currently have the ability to protect against these threats before they harm their business operations.
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