Visa Inc
The latest investment analysis on Visa Inc
Group Research - Equities13 Feb 2025
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Company Overview
Visa (V) was established in 1958 and is in the business of facilitating payments between businesses and consumers. Through its network, Visa facilitates the movement of money across more than 200 countries and territories. Key revenue drivers of Visa include consumer payments, new flows, and value-added services.
Investment Overview
Core business to benefit from migration to digital payments. 30% of global payments are still transacted in cash as per Bloomberg intelligence, which translates to an $18tn opportunity in our estimates. The shift from cash and checks to electronic payments will act as a key long-term driver of Visa's core business. Growing e-commerce penetration is also a tailwind for Visa owing to higher interchange fees in card-not-present transactions and cross border payments with higher foreign exchange service fees. In the near to mid-term, consensus estimates show international transaction volume are poised to grow 14%/12% in FY25/FY26F which should boost top and bottom lines as global travel and e-commence demand remains resilient.
Driving volume through new use cases; increasing yield through value-added services. Visa's Network of Networks strategy amounts to a $185t opportunity in new flows between individuals, businesses, and governments. This is more than 10x the cash and check opportunity in consumer payments. Visa Direct, a global platform for real time payments enables Visa to go beyond C2B into new use cases such as P2P, B2C,B2B, and G2C. Moreover, Visa's Value-Added Services which aid with revenue diversification and differentiation also add more value to transactions, increasing yields.
High operating margins above 68% owning to strong competitive moat. Visa is the largest payment player in a lucrative oligopoly, with 42% of market share according to Nilson Report, and it reaps powerful network effects owning to the vast number of merchants and cardholders that it serves. By end-FY24, Visa's total payments and cash volume amounted to $15.7 trillion per year, which connected 4.3 billion credentials to more than 130 million merchants. In its two-sided platform business model, every cardholder or merchant that comes onboard with Visa creates incremental value for the other party, which in turn deters incumbents by creating high barriers to entry. Consequently, Visa enjoys high net margins in excess of 68% which are significantly higher than the vast majority of businesses.
Lift TP to US$400, Maintain BUY. Based on FY25F/26F EPS, we lift our target price to US$400, based on 33x PER (previously: 31x), and at a 13% discount to our target multiple of 38x PE for Mastercard. Consensus expects Visa's EPS to grow at a CAGR of 12.8% between FY25F-FY27F, slightly lower than Mastercard's earnings CAGR of 14.5% owing to Visa's larger scale. Given Visa's dominating position in the payments space and its outstanding net margins at 68%, we think its valuation of 33x FY24/25F PER is quite reasonable. Long term structural trends towards digital payments will be a key driver for Visa, reinforcing our BUY recommendation.
Key risks:
Regulatory risks. Operating in an oligopoly, Visa's dominance and its network fees have been under regulatory scrutiny. Any change in laws that affect payment networks such as Visa could potentially lead to significant losses in earnings.
Severe and prolonged recession. A severe, prolonged recession or changes in consumer spending could hurt the core business with lower volume fees.
BNPL displacing credit. BNPL growth may threaten credit as consumers shift from credit cards. However, Visa has developed its own BNPL product as a hedge.
Visa (V) was established in 1958 and is in the business of facilitating payments between businesses and consumers. Through its network, Visa facilitates the movement of money across more than 200 countries and territories. Key revenue drivers of Visa include consumer payments, new flows, and value-added services.
Investment Overview
Core business to benefit from migration to digital payments. 30% of global payments are still transacted in cash as per Bloomberg intelligence, which translates to an $18tn opportunity in our estimates. The shift from cash and checks to electronic payments will act as a key long-term driver of Visa's core business. Growing e-commerce penetration is also a tailwind for Visa owing to higher interchange fees in card-not-present transactions and cross border payments with higher foreign exchange service fees. In the near to mid-term, consensus estimates show international transaction volume are poised to grow 14%/12% in FY25/FY26F which should boost top and bottom lines as global travel and e-commence demand remains resilient.
Driving volume through new use cases; increasing yield through value-added services. Visa's Network of Networks strategy amounts to a $185t opportunity in new flows between individuals, businesses, and governments. This is more than 10x the cash and check opportunity in consumer payments. Visa Direct, a global platform for real time payments enables Visa to go beyond C2B into new use cases such as P2P, B2C,B2B, and G2C. Moreover, Visa's Value-Added Services which aid with revenue diversification and differentiation also add more value to transactions, increasing yields.
High operating margins above 68% owning to strong competitive moat. Visa is the largest payment player in a lucrative oligopoly, with 42% of market share according to Nilson Report, and it reaps powerful network effects owning to the vast number of merchants and cardholders that it serves. By end-FY24, Visa's total payments and cash volume amounted to $15.7 trillion per year, which connected 4.3 billion credentials to more than 130 million merchants. In its two-sided platform business model, every cardholder or merchant that comes onboard with Visa creates incremental value for the other party, which in turn deters incumbents by creating high barriers to entry. Consequently, Visa enjoys high net margins in excess of 68% which are significantly higher than the vast majority of businesses.
Lift TP to US$400, Maintain BUY. Based on FY25F/26F EPS, we lift our target price to US$400, based on 33x PER (previously: 31x), and at a 13% discount to our target multiple of 38x PE for Mastercard. Consensus expects Visa's EPS to grow at a CAGR of 12.8% between FY25F-FY27F, slightly lower than Mastercard's earnings CAGR of 14.5% owing to Visa's larger scale. Given Visa's dominating position in the payments space and its outstanding net margins at 68%, we think its valuation of 33x FY24/25F PER is quite reasonable. Long term structural trends towards digital payments will be a key driver for Visa, reinforcing our BUY recommendation.
Key risks:
Regulatory risks. Operating in an oligopoly, Visa's dominance and its network fees have been under regulatory scrutiny. Any change in laws that affect payment networks such as Visa could potentially lead to significant losses in earnings.
Severe and prolonged recession. A severe, prolonged recession or changes in consumer spending could hurt the core business with lower volume fees.
BNPL displacing credit. BNPL growth may threaten credit as consumers shift from credit cards. However, Visa has developed its own BNPL product as a hedge.