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In my September 3, 2021 post, I disclose the purchase of additional Visa Inc. (V) shares in one of the 'Core' accounts in the FFJ Portfolio.
Just before the release of Q4 and FY2021 results, V was trading at ~$234. V's share price is currently ~$212.
After reviewing V's results and FY2022 outlook I have acquired additional shares and explain why in this post.
Visa - Stock Analysis - Recent Events
US Justice Department Probe
The U.S. Justice Department is probing V's relationships with large fintech companies as part of its antitrust investigation of the card giant. Antitrust investigators are looking into the financial incentives that V gave Square Inc., Stripe Inc., and Paypal Holdings Inc.
V has declined to comment on this matter. In March 2021, however, it indicated the US Justice Department was looking at its debit practices to determine whether V uses anti-competitive practices in the debit-card market.
The US Justice Department previously investigated the credit card payments industry. In 2010, Visa and Mastercard (MA) settled with the US Justice Department when they agreed to allow merchants to offer consumers incentives to use a low-cost credit card.
Buy Now, Pay Later (BNPL)
On October 27, 2021, V announced a growing list of issuers, acquirers and fintechs that are leveraging Visa’s technology to bring BNPL options to their customers.
A recent V study found that ~42% of all global consumers expressed interest in installment financing that is offered on their existing credit card or one for which they could apply. To help partners meet this demand, Visa Installments Solution is being deployed globally to make issuer-offered BNPL options available in-store and across e-commerce channels. With the network-based solution, financial institutions can add BNPL as a customized feature for credit card holders, on their already approved credit lines. Acquirers on the network can also activate the ability to enable installments for any of their retailers that accept V.
Tink Acquisition
On June 24, 2021, V announced it has signed a definitive agreement to acquire Swedish fintech Tink months after it ditched a planned acquisition of Tink's U.S. rival Plaid; Visa terminated a planned $5.3B deal with U.S. data-sharing platform Plaid in January 2021 following a U.S. government lawsuit aimed at blocking the deal on antitrust grounds.
Tink is a European open banking platform that enables financial institutions, fintechs and merchants to build tailored financial management tools, products and services for European consumers and businesses based on their financial data.
Terms are 1.8B euro (~$2.2B) inclusive of cash and retention incentives.
The transaction is subject to regulatory approvals and other customary closing conditions.
V will fund the transaction from cash on hand. This transaction will have no impact on V’s previously announced stock buyback program or dividend policy.
Currencycloud Acquisition
On July 22, 2021, V announced its intent to acquire British cross-border payments provider Currencycloud at a valuation of 700 million pounds (~$0.962B).
Launched in 2012, Currencycloud facilitates cross-border payments for nearly 500 banking and technology companies, including well-known European fintechs Klarna, Monzo, Starling and Revolut. Since its launch, it has moved more than $75B in payments to over 180 countries.
Visa has been a Currencycloud shareholder since 2020; the financial consideration will be reduced by the equity that V already owns in the startup.
The transaction is subject to regulatory approvals and other customary closing conditions.
V will fund the transaction from cash on hand. This transaction will have no impact on V’s previously announced stock buyback program or dividend policy.
Cybersource
CyberSource Payments, a V solution, processes debit, credit and closed-loop gift cards across the globe and multiple channels with unparalleled scalability and security. It supports an extensive list of payment cards and recurring billing options across a wide choice of gateways and acquiring banks, all through one connection.
Using CyberSource solutions, merchants can accept payments (cards, digital payment services, alternative payments) in over 190 countries, fund in more than 20 currencies, and protect customers from fraud loss.
Payment security and tokenization solutions enable payment acceptance via the web, mobile and call center/IVR.
In FY2021, CyberSource added 28 new acquirer partners and 45,000 merchants resulting in growing payments volume twice as fast as V's broader client base. In addition, V's risk solution on CyberSource, called Decision Manager, grew over 30%.
V has doubled the number of tokens over the past year to 2.6B and enhanced the capabilities to manage them through Visa Cloud tokens. Across more than 8,600 issuers and 800,000 merchants, tokens have led to a 2.5% increase in approval rate and a 28% reduction in fraud rates.
Visa Advanced Authorization and Visa Risk Manager use artificial intelligence and machine learning capabilities. Screening 30% more transactions in 2021 than in 2020 helped reduce fraud by $26B.
V's efforts in authentication, risk, identity, and authorization optimization have led to cross-border card-not-present approval rates increasing by nearly 2% in the past year. Value-added services (VAS) revenue grew 25% in Q4 and also drove additional volume. Since the beginning of the COVID pandemic, V's VAS revenue has averaged a quarterly growth rate in the high teens and was ~$5B in FY2021.
Visa - Stock Analysis - Financial Results
Q4 and FY2021 Results
Please refer to V's Q4 and FY2021 Form 8-K and Earnings Presentation.
Free Cash Flow (FCF)
V's FY2011 - FY2021 annual FCF (in billions) is $3.52, $4.63, $2.55, $6.65, $6.17, $5.05, $8.61, $12.22, $12.03, $9.70, and $8.71B.
FY2022 Guidance
Through the first 3 weeks of October, US payments volume was up 32% above 2019 with debit up 44% and credit up 22% from 2019. Processed transactions were 26% above 2019. Cross-border volume excluding transactions within Europe on a constant dollar basis was 94% of 2019 and up 8 points from Q4 and 2 points from September 2021.
Travel-related spending versus 2019 improved 4 points compared to September and is 65% of 2019 levels. Card-not-present non-travel was 49% above 2019 and up 6 points from Q4 and down 2 points from September.
On the Q4 earnings call, management states business has been recovering for the past 3 to 4 quarters. However, business is not yet back to normal on a global basis.
Debit and e-commerce have outperformed and stayed resilient.
While cross-border travel is recovering, this area of business is still well below pre-COVID levels; the pace of recovery depends on border openings.
Assuming current trends are sustained through December, V expects Q1 2022 net revenue growth in the high teens. Client incentives as a percent of gross revenue are likely to be 26% to 27% which is in line with Q4 2021.
V is finding it to be a challenge to have reasonably accurate visibility 4 quarters out. Gross revenue growth is heavily dependent on the pace of the cross-border travel recovery. Forecasting is, therefore, a function of various variables and the following assumptions V has made for internal planning purposes:
- Domestic volumes and transactions - no disruptions from COVID-related lockdowns. The recovery trajectory underway in payments volumes and processed transactions stays intact for FY2022.
- Cross-border travel - the recovery underway continues steadily through FY2022 to reach 2019 levels in the summer of 2023.
- E-commerce - the strong growth in cross-border e-commerce continues.
- New flows and value-added services growth in the high teens.
- Client incentives as a percent of gross revenues between 26% - 27% which is consistent with Q4 2021. Pre-COVID, this percentage increased by 50 - 100 basis points each year due to the impact of new deals and renewals.
- Benefit from revenue mix improvement as cross-border travel continues to recover. This is partially offset by the lapping of incentive reductions in FY2021 due to the pandemic's impact.
These assumptions result in the high end of mid-teens net revenue growth for FY2022 with Q1 growth in the high teens moderating through the year.
Operating expenses are expected to grow in the low teens in FY2022. V has already increased marketing investment and heavy investment is being made in the technology platforms to continue to enhance functionality, flexibility, security, and reliability.
Expense growth will be higher in the first half of FY2022 and will moderate in the second half.
Non-operating expenses are expected to be ~$0.12B - $0.13B.
Visa - Stock Analysis - Credit Ratings
V's current unsecured domestic long-term debt credit ratings and outlook are:
- Moody's - Aa3 (stable)
- S&P Global - AA- (stable)
These ratings are the lowest tier of the high-grade investment-grade category and define V as having a VERY STRONG capacity to meet its financial commitments. The ratings differ from the highest-rated obligors only to a small degree.
These ratings are acceptable for my conservative nature.
Dividend and Dividend Yield
V's dividend history is accessible here.
On October 22, V's Board of Directors authorized a 17% increase in the $0.32/share quarterly dividend to $0.375/share. With shares trading at ~$212, the dividend yield is ~0.7%.
In January 2020, V's board of directors authorized a $9.5B share repurchase program. In January 2021, it authorized an additional $8.0B share repurchase program. These authorizations have no expiration date.
V had $4.7B of remaining authorization for share repurchase as of September 30, 2021.
The weighted average number of diluted outstanding shares has been reduced from 2.828B in FY2011 to 2.17B in Q4 and 2.19B for FY2021.
In Q4, V bought 13.2 million shares of Class A common stock at an average price of $231.33 for $3.053B. In FY2021, V repurchased 39.7 million shares of Class A common stock at an average price of $219.34.
Visa - Stock Analysis - Valuation
When I wrote my September 3 post, V's share price was ~$226. FY2021 - FY2023 guidance from the brokers which cover V is:
- FY2021 - 32 brokers - mean of $5.82 and low/high of $5.69 - $5.93. Using the mean estimate, the forward adjusted diluted PE is ~38.8 and ~38.3 if I use $5.90.
- FY2022 - 35 brokers - mean of $7.26 and low/high of $6.85 - $7.83. Using the mean estimate, the forward adjusted diluted PE is ~31 and ~29.3 if I use $7.70.
- FY2023 - 24 brokers - mean of $8.60 and low/high of $8.01 - $9.60. Using the mean estimate, the forward adjusted diluted PE is ~26.3 and ~24.3 if I use $9.30.
Shares are now trading at ~$212 and V has reported FY2021 GAAP EPS of $5.63 for the publicly traded Class A common stock thus resulting in a diluted PE of ~37.7.
By way of comparison, V's FY2011 - FY2020 diluted PE levels are 28.44, 42.11, 29.34, 30.42, 30.06, 31.46, 40.72, 29.85, 35.32, and 44.73.
FY2021 adjusted diluted EPS was $5.91 thus giving up an adjusted diluted PE of ~36.
The brokers which cover V are likely adjusting their earnings estimates. For now, however, the online brokerage platforms I use to obtain earnings estimates reflect the following:
- FY2022 - 34 brokers - mean of $7.09 and low/high of $6.83 - $7.45. Using the current ~$212 share price and the mean estimate, the forward adjusted diluted PE is ~30 and ~29 if I use $7.45.
- FY2023 - 30 brokers - mean of $8.45 and low/high of $7.96 - $9.60. Using the current ~$212 share price and the mean estimate, the forward adjusted diluted PE is ~25 and ~22 if I use $7.45.
Only 6 brokers have provided FY2024 estimates so I disregard these estimates.
Visa - Stock Analysis - Final Thoughts
V and MA have built and maintained a dominant market share which has led to an oligopolistic structure. This tends to draw regulatory scrutiny and is the first risk in 'ITEM 1A. Risk Factors' in V's FY2020 Form 10-K (page 20 of 134).
There is significant uncertainty surrounding the timing, form, and magnitude of the US Justice Department's actions resulting from its current probe. Having said this, news about the probe is not news in that V raised this matter in March 2021.
I continue to be confident V has a promising future. It is an industry leader, is highly profitable, generates significant FCF, and intends to continue to reward shareholders. One way of rewarding shareholders is through the repurchase of shares. Investors should, therefore, want V's share price to drop.
I have added to my exposure following this pullback.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long V and MA.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
