Visa: Thriving Amid Macroeconomic Challenges And Banking Instability
Contributor since 2013 / 6734 Followers
Summary:
- Visa’s strategic focus on value-added services, new payment flows, and digital partnerships sets the stage for a strong 2023 performance.
- Visa Direct’s expansion and consistent growth in VAS serve as vital growth vectors for the company, despite macroeconomic challenges.
- Vigilance is crucial when considering risks from macroeconomic conditions, regulatory changes, and emerging disruptive technologies.
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As the world grapples with ongoing macroeconomic challenges and instability in the banking sector, Visa (NYSE:V) emerges as a beacon of resilience. Our in-depth analysis suggests that the company’s strategic focus on value-added services (VAS), new payment flows, and digital partnerships will propel it toward a relatively strong 2023. In this article, we’ll delve into the potential growth vectors in Visa Direct’s expansion, the consistent growth of VAS, and the crucial role of digital partnerships with platforms like Apple, Alphabet, and Meta.
Multiple Tailwinds Set Up For A Relatively Strong 2023
Our analysis of Visa’s growth opportunities and strategic initiatives leads us to believe that the company is well-positioned to thrive despite the challenging macroeconomic environment and instability in the banking sector. Based on our research, we forecast that Visa will experience continued expansion, driven by its resilience and focus on value-added services, new payment flows, and digital partnerships.
Our investigation suggests that Visa’s VAS and new payment flows will be critical growth vectors for the company. With Visa Direct expanding its geographical reach and scaling up, we expect healthy yields and increased market penetration. Currently, Visa Direct serves various sectors such as the gig economy, marketplaces, insurance payouts, and cross-border remittances, among others. While the service now supports over 60 use cases, the real opportunity for Visa Direct, in our opinion, lies in deepening penetration rather than expanding yields.
Moreover, VAS has consistently grown by over 20% and continues to provide expansion opportunities across acceptance, risk, and advisory services. Visa offers these services to issuers, merchants, and consumers alike, and we believe there is plenty of room for further growth, particularly on the issuer side, where Visa sees potential to gain penetration in its core issuer processing business.
Our research indicates that digital partnerships will be a significant driver of Visa’s volume growth, especially through relationships with platforms such as Apple (AAPL), Alphabet (GOOG) (GOOGL), and Meta (META), and enablers such as Block (SQ), Adyen (OTCPK:ADYEY), and MQ. To better serve the long tail of fintech partners, Visa has created programs such as Visa Fast Track, which supports a wide range of fintech use cases (e.g., digital wallets, financial inclusion, B2B, digital currency), and Visa Ready, a certification program that helps technology companies build and launch payment solutions that meet Visa’s global standards around security and functionality. In our view, these digital partnerships represent a material driver of Visa’s volume growth.
We project that new flows will offer a much larger growth opportunity compared to Visa’s core card business, as evidenced by the strong growth from new products like Visa Direct, with volumes up 39% YoY. We foresee Visa Direct continuing its growth trajectory, focusing on four key areas: 1) growing existing use cases and partnerships, particularly in cross-border transactions; 2) expanding into new geographies; 3) exploring new use cases; and 4) signing up and activating enablers.
In our assessment, Visa’s B2B Connect platform is adeptly addressing the main pain points in cross-border B2B payments, such as speed, reliability, flexibility, and transparency. We expect B2B Connect to continue shifting cross-border flows away from traditional correspondent banking channels. The platform currently has access to over 100 markets and is adding banks every month, with some bank partners even doubling their volumes when partnering with Visa.
We concur with Visa’s view that the FedNow network and Zelle are partners rather than significant competitive threats. In our opinion, Visa’s global scale and security make it difficult for competitors to match its offerings. We predict that account-to-account (A2A) payments will continue to grow, driven by Visa’s disintermediation of ACH payments. Furthermore, our due diligence reinforces our view that A2A payments will continue to expand.
Risks
Based on our research, we have identified three significant risks faced by Visa, which could impact its revenue and earnings. These risks are primarily related to macroeconomic conditions, regulatory environment, and potential disruption from emerging technologies.
Firstly, Visa’s network volume is highly correlated with consumer expenditures. This indicates that during a macroeconomic downturn, consumer spending could decline, reducing transaction volumes on Visa’s network. Consequently, this would result in decreased revenue and earnings for the company. Given the increasing macro uncertainties and recession fears, we recommend monitoring key economic indicators, such as GDP growth, unemployment rates, and consumer confidence indices, to anticipate potential changes in consumer spending patterns.
Secondly, regulatory risk is another significant concern for Visa. The company and other payment networks have faced increased scrutiny over interchange and network fees charged for transactions. Regulators in various jurisdictions have either implemented or are considering measures to limit these fees, which could negatively affect Visa’s revenue streams. It is essential to closely follow regulatory developments in key markets and assess the potential impact of such changes on Visa’s profitability. Furthermore, we should explore opportunities for Visa to diversify its revenue sources or adapt its business model to minimize the effects of regulatory changes on its earnings.
Lastly, disintermediation risk is a growing challenge for Visa, as the company is susceptible to potential disruption from new technologies, such as cryptocurrency, account-to-account payments, and Buy Now, Pay Later (BNPL) solutions. These emerging technologies could change the payments landscape by offering alternative transaction methods that bypass traditional payment networks like Visa. To better understand the extent of this risk, we need to evaluate the adoption rates and market penetration of these new technologies, as well as their potential to scale and challenge Visa’s dominance in the payments industry.
Financial & Valuation
Our financial analysis of Visa reveals a strong rebound in the company’s performance following the modest hit it experienced in 2020 due to the Covid-19 shutdown. After witnessing a decline of 4.9% in fiscal year 2020, Visa’s revenue growth bounced back by 10.3% in 2021, followed by an even more robust growth of 21.6% in fiscal year 2022, reaching $29.3 billion. Based on our calculations, this translates to a Compound Annual Growth Rate (CAGR) of 12.3% from 2020 to 2022. As the economy continues to reopen and travel remains a popular activity, we expect Visa’s revenues to grow by a solid 10.4% in the current fiscal year, amounting to $32.4 billion.
Earnings per share (EPS) are anticipated to increase by 12.8% in fiscal year 2023 to $8.46 and accelerate further by 14.5% in the subsequent fiscal year, reaching $9.69. Visa operates a capital-light business model, necessitating only 2-3% of its revenues for capital expenditures. This enables the company to be highly cash flow generative, with expectations of generating $19.3 billion in free cash flow in fiscal year 2023, up 7.9% year-over-year. In comparison, Visa’s net income for 2023 is projected to be $17.6 billion, which indicates a high earnings quality.
Visa maintains a modest net debt, exiting fiscal year 2022 with $3.9 billion, which we expect will be quickly paid off given the company’s sizable free cash flow. Consensus estimates suggest that by fiscal year 2024, Visa will have approximately $2 billion in net cash. The company’s robust financial performance is a testament to its underlying business momentum, driven by the global shift from cash to electronic payments, its technology-focused business model, and the oligopoly market structure.
Currently, Visa’s stock is trading at just under 25 times forward 12-month consensus EPS, which lies in the middle of its 10-year range. Relative to the S&P 500, the company is trading at a 38% premium, which is towards the lower end of its 10-year range. We believe this is a fair premium, given the increasing maturity of Visa’s core business in credit and debit card payment processing. In conclusion, we view Visa’s stock as fairly valued based on our research and analysis.
Conclusion
Visa’s growth potential is fueled by its strategic focus on value-added services, new payment flows, and digital partnerships. The company has displayed remarkable resilience amid macroeconomic challenges and banking instability, positioning itself to benefit from the ongoing shift toward electronic payments. However, it is essential to remain vigilant regarding risks from macroeconomic conditions, regulatory changes, and emerging disruptive technologies. Overall, we view Visa’s stock as fairly valued, given its robust financial performance and the opportunities that lie ahead.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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