Prepared by Tara, Senior Analyst at BAD BEAT Investing
While we have generated massive returns since late March after switching from being mostly short to nearly all long in April, there were some names that we bought in late March and early April. One such name that we were buying on the way down was Visa (NYSE:V), which we told members was an absolute gift under $150. With shares now over $190, that call has netted returns of nearly 30%. We think there is more room to run here. Make no mistake, the stalling of the global economy due to COVID-19 shutdowns have caused obvious volume declines for Visa and related companies. It is simply a fact. Consumers spent a lot less in the last two months. The bears will argue that the real economy will suffer all year and probably longer and that our consumer economy is not going to recover anytime soon and therefore Visa should be avoided. There is some truth to this. The consumer is pressured. But the market is not thinking about where we will be in a few weeks or months from now. For the most part, the market is pricing equities based on expectations for late H2 2020 and really 2021 performance. This is why the averages have spiked. The market is not pricing equities for current or near-term performance; it is looking ahead. So with these juicy gains in the stock here, what to do? We recommend trimming about 30% of the position to go buy yourself something nice, but to let the rest run. Let’s check in on recent performance.
Revenue growth continues
When it comes to a growth stock like Visa, every financial metric we watch begins with revenues. We have to tell you with about half of the quarter being impacted by COVID-19, particularly with the international exposure, the results were pretty darn good. It seems every quarter we see exemplary growth in the top line. The just-reported quarter saw another impressive top line for Visa. While the growth was a bit less than usual, it was solid growth nonetheless, continuing a winning Q2 run:
Source: SEC filings, graphics by BAD BEAT Investing
This trajectory is impressive. But what is driving the continued growth? First, innovation. The company is a fintech (that is “financial technology company” for those unfamiliar with the term), and it is constantly working to offer new and exciting ways to pay and get paid. This comes even with a massive economic slowdown. Truly impressive.
Now, over the years, the story has always been how the volume continues to grow markedly. Now, with the slowdown, volumes were of course lower than they otherwise would have been. Volume will return soon. But longer-term there is more to the Visa story.
What do we mean? Well, with more and more transactions globally moving away from cash and check to electronic means, Visa will continue to gain. While regulation can be a risk, we think it is more of a benefit in many ways because new regulation can be adapted to by a major company like Visa, but could squeeze out smaller competitors or create barriers to pay system entry. Further, as more credit cards can be loaded onto smartphones, Visa stands to gain. This revenue pattern is exactly what we want to see and what we continue to expect. Actually, excluding the present Q3 which is still dealing with shutdown issues, we think double-digit revenue growth returns later this year. We think Q3 is the bottom in terms of the downturn in transactions and volumes.
The company delivered a strong report, and revenues were strong, but slowed some from COVID-19, but beat expectations by $101 million, coming in at $5.85 billion. While past performance is no guarantee of future results, it can be a strong predictor. The results strongly suggest the company is continuing to execute. They further suggest that Visa will continue its stable and reliable growth, though not every quarter can be a beat versus expectations. We will say again, firth time, maybe the sixth, COVID is a temporary headwind. That said, net revenue was a near 7% increase over Q2 2019. This was primarily due to a 5% jump in payment dollar volume and a 7% increase in processed transactions to approximately 34.9 billion.
Merchants and consumers are moving away from paper and cash transactions globally. Future growth is that there are many more markets, especially in 3rd world countries, that stand to benefit from Visa’s technology and the services it can offer. Visa has a lot of potential for international growth to bring more electronic means to underserved countries and businesses worldwide. However, it takes us back to our point above about COVID-19 hampering the quarter with international exposure. Since COVID-19 was in Asia and Europe for pretty much the entire quarter, we saw cross-border volumes decline 2%. We think they will rebound in fiscal Q4.
Operational expenses rise
We still hate the growth in operational expenses. This has been our biggest issue with the company. While it is not like it is a massive problem, as they are rising on a comparable basis less than the increase in revenues usually, they still continue to rise. We would like to see these expenses rise a bit more slowly, boosting margins. With the 6% rise in revenues, we were hoping expenses would rise no more than 6% this quarter. Well, leave it to COVID-19 to deliver another surprise. Operating expenses were up just 4% as reported and 3% on an adjusted basis.
Revenue grew, and expenses grew modestly. The higher spending is still justified by the revenue growth and investments for the future. That said, the increased spending did not cause margins to decrease relative to last year on an adjusted basis. This quarter, operating margins were a solid 67% versus 66% last year. There was continued strong growth in earnings per share:
Source: SEC filings, graphics by BAD BEAT Investing
Every year, the company has been expanding its bottom line and doing so significantly, justifying the stock’s premium valuation. The stock is never “cheap” on traditional valuation metrics. And, at least right now, growth has slowed. But look to the future where billions more transactions will occur every year. This is why it trades at a premium.
Net income came in at $3.08 billion. Further, earnings per share were $1.39, rising 9% over last year’s $1.28. This figure surpassed expectations for $1.35 per share in earnings, mostly on the back of the higher-than-expected revenues and lower-than-anticipated expenses. We should also point out that the fact that the company also repurchased $3.2 billion worth of stock this quarter. We underestimated the impact of the repurchases.
Our 2020 projections
As we move forward, the present fiscal Q3 is going to see pain as well. Through April 28, U.S. payments volumes are down 19%, debit is down 6%, and credit is down 31%. While that does not mean the quarter is a total loss, April was the most difficult month of the COVID-19 crisis in the United States in terms of reduced economic activity. Considering year-to-date performance and the declines in Q3 performance that we know of, while factoring in share repurchases and the current business trends, we believe 2020 revenue will now approximate $22.0 billion to $23.5 billion, a little more than 10% lower than we previously expected. With this reduced revenue, single-digit expense growth, and repurchases, we now see earnings at $4.90 to $5.30. We will be closely watching expenses in addition to payment volumes and processed transaction figures in fiscal Q3. Sure, the stock is definitely “overvalued” on the new fiscal 2020 expectations, but the market is looking ahead to 2021. Take some profit in the juicy gains if you have them, maybe 30% of the position, and let the rest run.
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Disclosure: I am/we are long V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.