Is Visa Prepared for a Grim Future?
Dominic Byrne | May 25th, 2020 | Editor: Eden Chan
As the Corona Virus pandemic subdues consumer sentiment and economic activity, Visa Inc. (V) exceeds the market. Consumers are spending less and aren't traveling, but Visa is still growing -are they prepared for a tough quarter?
Balance Sheet and Fundamentals
Visa is poised to survive even the worst market conditions – but necessarily thrive. The company's quarter one 2020 earnings (10-Q) indicated that it was sitting on $9.7 billion in cash, comprising the majority of the companies $19.9 billion in current assets. Visa has approximately $72.8 billion in total assets and $38.2 billion total liabilities – indicating an almost 2:1 asset to liability ratio. While the Dow Jones Industrial Average saw a 23% plunge during the first quarter of 2020, Visa increased its net income 3%, from $2.98 billion to $3.08 billion in the same period. Visa has a strong price to earnings ratio (PE) of 33, indicating significant growth and expectations for their earnings. This figure is similar to industry competitor, Mastercard's (MA) PE of 35. Also, Visa's EPS is 5.56, compared to Mastercard's 7.82 and American Express's (AXP) 6.63.
According to their 2019 annual report (10-K), Visa generates 96% of its revenue through three streams – strongly affected by economic activity:
Service revenues – Service revenues is what the company earns for services provided to card issuers. Payment volume plays a significant role in this revenue source as the more someone spends, the more Visa will generate in service revenue. As this fee is proportional to the price of the good, this form of income is hedged against inflation – a great feature for long-term investing. Visa's service revenues grew 7.9% from Q1 2020 against Q1 2019 – a surprising figure given subdued economic activity as a result of the pandemic.
Data processing revenues – Data processing revenue is based on the number of transactions on the Visa network. Data processing is a small fee which the company receives for the collection, authorization, clearing and settlement of funds. In Q1 of 2020, data processing revenues grew 10% when compared to figures from Q1 2019.
International transaction revenues – International transaction revenues are earned through cross border and currency exchange activity. These revenues are generated when a cardholder purchases a good or service from a country other than the country of origin. Because these fees are dependent on international travel and contribute a significant proportion of Visa's revenue, COVID-19 will have a profound effect on revenue if restrictions are not eased. Nonetheless, Visa's international transaction revenues still showed a growth of 2% - a figure they likely won't see in Q2 2020.
Advancements: Although distancing measures restrict many from shopping at brick and mortar stores, a wave of e-commerce spending has propelled Visa. In Latin America alone, 13 million cardholders made e-commerce transactions for the first time. In addition, while face-to-face sales fell 45% as distancing measures shocked the U.S, Visa saw an 18% rise in US digital commerce spending through April. In addition, the companies "touchless commerce" in the form of tap payments also rose by 150% in the US in March alone – relative to a year earlier. Visa is making significant leaps in their development of alternate payment methods that will allow the company to persist in the current market and soar post COVID-19.
Future outlook: Given subdued economic activity and the worsening coronavirus activity, it is likely that Visa will see a rough 2nd Quarter in 2020 before it propels to new heights. Visa's safe balance sheet and current advancement combined with its growth in the grim first quarter indicates strong momentum for the rest of the 2020 calendrical year. All things considered, the market and its volatility will throw Visa and other stocks into disarray as COVID-19 ravages the world in the short-term, but Visa's long-term potential is immense. The virus has provided new opportunities for expansion in the e-commerce industry and has proven to be of little effect to the company's balance sheet. Though Visa is down $15 from $198 (7%), the company has made advancements that will see significant growth in the coming quarters and years – a promising company in a time of uncertainty and turmoil. So, is Visa prepared for the grim future of face-to-face transactions and restricted travel? Yes, we believe they certainly are.
Written for Lallic Partners
Published by Koki Mashita
References: http://d18rn0p25nwr6d.cloudfront.net/CIK-0001403161/b1cb0e13-ca32-4eb6-8848- 01352e8ac0d9.pdf https://www.fool.com/investing/2017/04/25/how-visa-inc-makes-money.aspx https://www.fool.com/investing/2020/05/07/how-bad-of-a-hit-will-visa-take-from-the- lockdowns.aspx https://finance.yahoo.com/quote/V?p=V&.tsrc=fin-srch https://www.marketwatch.com/story/visa-sees-massive-digital-acceleration-with-millions-trying-e-commerce-for-the-first-time-2020-05-13?siteid=yhoof2&yptr=yahoo