Visa Inc. – Watch it Fly, But for a Lot of Money

Visa, although we don’t think there is any need to tell you this, is a payment processing company. Its primary business is facilitating payments between consumers, merchants, governments, and pretty much anyone else who needs a payment processor. Visa cards are some of the most widely used cards in the world (along with Master Card), and the company has numerous other services that provide value additions to its customers.

 

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Visa total payment volume has experienced a small but stable level of growth. The company’s primary growth drivers are its new ventures as opposed to its legacy business. Source: Annual Statements

Another Year, More Growth

I am always surprised when I read that Visa has been growing in recent years. You would think that the company would begin to stagnate since its main business has essentially been the same for as long as anyone can remember.

However, the company has put up the numbers in recent years. Even in 2021, the company is moving from strength to strength. It seems that the digital payments space is increasing rapidly, and companies like Visa and Mastercard are thus able to beat expectations on a quarterly basis.

Over the last three years, the company’s earnings have grown at a rate of 11% per year, with the revenues surging 6% yearly during that time. This is an excellent indicator of performance, as it shows that the sales are increasing and that the management is simultaneously cutting costs and increasing the margins.

It is surprising to see that Visa, Mastercard, and UnionPay can exist in such harmony. Analysts widely agree that there is enough room for the three of them to not only coexist but also grow.

 

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Visa is betting big on crypto, and with good reason. The crypto.com visa card showed an increase in spending through most of 2020, even though the consumer confidence index was falling for large parts of the year. Source: PRNewsWire

Significant Growth Opportunities Ahead

Visa has been betting big on crypto in recent years. The company has been pushing for Central Bank Digital Currencies (CBDCs). CBDCs are essentially digital currencies that are backed and controlled by the central bank. While they do not offer some of the privacy features associated with crypto, they still provide all the convenience.

Visa has also been trying to integrate its products with Ethereum and USDC. The company has been working with numerous high-profile partners in the crypto space (including crypto.com). It is still trying to expand its horizons in the digital currency space.

For example, the company is now looking to move into the NFT space, having bought its first NFT earlier in September. The only problem with this approach is that it tends to focus more on current trends that may not have a long-term future. NFTs are highly controversial, and it is possible that they do not end up being as big as some are predicting them to be.

You Need a Visa if You Want to Soar

Most analysts predict the company having a solid few years from here onward. According to consensus estimates, the revenues should increase from a little less than $22 billion in FY20 to over $24 billion in FY21, going all the way to $32 billion by FY23.

The profits, and more importantly, the net margins, should see a similar upward trend. Net profit, at $10.8 billion in FY20, is expected to be over $18 billion by the end of FY23, with the net margin increasing from 49.7% to 55.9%.

However, while Visa is doing exciting things and is expected to grow rapidly, it is also priced like a tech company. Despite the enormous predictions, the company is still trading at 26.3x its FY23 earnings. Because high levels of growth are not guaranteed for the company, this is too high a multiple to justify based on value investing principles. Sadly, there is more bad news.

Curbing Competition

Antitrust lawsuits are becoming more common by the day. The public is pushing for governments worldwide to restrict large corporations’ power over their daily lives. While tech companies with massive user bases are the ones primarily affected, companies like Visa are not exempt either.

In 2020, the UK Supreme Court ruled that companies such as Visa and Master Card had restricted competition on numerous accounts and specifically curbed competition through the companies’ scheme of rules between 1992 and 2007. This means that Visa could be liable for billions of pounds in fines.

Legislation like this has become very common in recent years. Visa is not alone, as Master Card has also been hit with numerous antitrust fines in recent years. While none of these fines will bankrupt the company, they cast a further shadow over its future prospects. As such, while Visa has a positive outlook, it also seems like it is a bit too overpriced right now.