Visa (V) and its peer Mastercard (MA) have virtually monopolized the payments processing industry.
Visa is basically running the toll booth of daily transitions, benefiting from the full potential of its payments processing business model. Functioning as a toll booth whenever we swipe our cards for our daily coffee or through Netflix’s (NFLX) automatic subscription payment, Visa enjoys slick and steady revenue streams.
Further, due to the company’s long-term relationships with banking institutions all over the world (this is the case for Mastercard as well), Visa enjoys an exceptional moat.
Note that while some fintech companies such as Paypal (PYPL) and Square (SQ) may seem to be industry competitors, this is not the case. Fintech companies still employ Visa’s very own processing network to complete transactions. Hence, if anything, the company is benefiting from the ongoing developments in the fintech industry.
Due to its market-dominant position and high-margin business model, Visa has produced market-beating returns over the years. That said, shares are not particularly cheap at the moment. While I am optimistic regarding the stock’s long-term potential, I am neutral at the moment.
Improving Results
Visa’s Q4 results showcased robust performance improvements from last year’s adversely impacted results.
Due to a significant number of retail locations being forced to shut down in the midst of the pandemic last year, Visa’s processing volumes had softened in the prior-year period. While the pandemic is still persisting, global restrictions have eased, resulting in Visa reporting year-over-year Q4 revenue growth of 29%, to $6.6 billion. This celebrates a new quarterly record for the company.
Increased revenues were attributed to advancements across the board. Payments volumes grew 17% on a constant currency basis, reaching $2.7 trillion, as retail locations began reopening and traveling volumes somewhat recovered.
Cross-border volumes improved significantly, growing 38% on a local currency basis. Excluding Europe, which still struggles with increased COVID-19 restrictions, cross-border volumes grew 36% year-over-year.
As I mentioned, Visa operates a frictionless business model. Its gross margins are practically 100%. Think of Visa’s revenues as “royalties” acquired for every Visa-powered payment processed, with basically no cost of sales.
Hence, net margins hover at sky-high levels, reaching 54.6% in fiscal Q4. Visa’s business model is scalable enough that it should come as no surprise if net margins end up growing beyond 60% at some point, as Visa matures and international transaction volumes keep increasing.
Capital Returns & Valuation
Powered by Visa’s historically rich bottom line, management has been able to amply reward its shareholders through both dividends and stock buybacks.
The company has hiked its dividend annually for 13 years now, with its latest dividend per share increase being an impressive 17.2%.
Stock repurchases also remain robust. In its Fiscal Year 2021, Visa repurchased a total of 39.7 million shares at an average price of $219.34/share for $8.7 billion. Since this has been the main method for Visa to return cash to shareholders, the company has repurchased and retired around 25% of its outstanding stock since 2009.
That said, Visa’s qualities do not come at a discount. The stock is currently trading with a forward P/E ratio of 31.2, which is somewhat higher than its historical range.
Wall Street’s Take
Turning to Wall Street, Visa has a Strong Buy consensus rating, based on 13 unanimous Buys assigned in the past three months. At $273.46, Visa’s stock prediction suggests 24.4% upside potential.
Conclusion
While Visa’s results have improved significantly compared to last year, investors should be wary of the stock’s expanded valuation. That said, investors should not anticipate a violent valuation compression either, in my view. This is due to the market being willing to pay a premium for quality growth companies these days.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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