Stock of the Week - Visa (28.11.2024)

Visa, the global payments technology leader, delivered another quarter of solid growth while navigating regulatory headwinds and an evolving competitive landscape. The company's recent performance demonstrates its resilience and market dominance, though the Department of Justice's antitrust lawsuit has created additional uncertainty around its long-term market position in the U.S. debit card segment.

Q4 FY24 Results 

In its fourth quarter, Visa reported revenue of $9.62 billion versus estimates of $9.49 billion, Adjusted EPS of $2.71 compared to estimates of $2.58, Payment Volume of $3.41 trillion against estimates of $3.4 trillion, and Processed Transactions of 61.5 billion, representing a 10% year-over-year increase.

Overview of Q4 Performance 

Visa's fourth quarter results demonstrated continued momentum, with revenue growing 12% year-over-year to $9.62 billion. Key metrics compared to estimates include:

• Revenue: $9.62 billion vs estimate $9.49 billion
• Adjusted EPS: $2.71 vs estimate $2.58
• Payment Volume: $3.41 trillion vs estimate $3.4 trillion
• Total Processed Transactions: 61.5 billion vs estimate 61.5 billion
• Service Revenue: $4.20 billion vs estimate $4.13 billion
• Data Processing Revenue: $4.61 billion vs estimate $4.70 billion
• International Transaction Revenue: $3.47 billion vs estimate $3.48 billion

Payment volume increased by 8% in constant currency, while cross-border volumes grew 13%. The company maintained its strong profitability with operating margins remaining well above industry averages, reflecting the scalability of its business model and network effects. Net income showed healthy growth, supported by controlled operating expense growth of 6.8% year-over-year.

Earnings vs Estimates. Source: Bloomberg

Regulatory Challenges and Market Position 

The Department of Justice's antitrust lawsuit, filed in September 2024, represents a significant challenge to Visa's market dominance in the U.S. debit card segment. The lawsuit alleges that Visa has unlawfully maintained a monopoly in debit card transactions, processing over 60% of U.S. debit transactions and collecting more than $7 billion in annual processing fees. While this creates uncertainty, Visa's diversified revenue streams and strong international presence help mitigate the potential impact.

Global Growth

International markets continue to drive growth, with Latin America showing a 24% increase in payment volume and CEMEA recording 19% growth. Europe demonstrated solid performance with a 12% rise, while Asia Pacific growth was more modest. The company's cross-border volume, excluding intra-Europe, grew 13% year-over-year, indicating strong recovery in international travel and e-commerce transactions.

Strategic Initiatives and Innovation 

Visa continues to invest in future growth through strategic acquisitions and partnerships. The recently announced acquisition of Featurespace, a developer of real-time AI payments protection technology, demonstrates Visa's commitment to enhancing its fraud prevention capabilities. The company's value-added services segment showed particularly strong growth of 22% year-over-year, reaching $2.4 billion in Q4.

Financial Outlook

Looking ahead to FY2025, Visa projects revenue growth in the high single-digits to low double-digits, with operating expense growth following a similar pattern. The company expects EPS growth at the high end of low double-digits, and anticipates Q1 2025 revenue growth in the high single-digits. This guidance reflects Visa's confidence in its business model despite ongoing regulatory challenges and competitive pressures.

Market Challenges and Competitive Landscape 

Visa faces several key challenges in maintaining its market leadership. The regulatory scrutiny and potential implications of the DOJ lawsuit create uncertainty around its U.S. debit card operations. Growing competition from fintech innovators and alternative payment methods continues to pressure traditional payment networks. The company must also balance growth objectives with regulatory compliance while managing increasing demands from merchants for lower transaction fees.

Investment Perspective 

While Visa's fundamental performance remains strong, investors must consider both opportunities and risks. The company's established market position, strong network effects, and ongoing digital payment adoption provide support for continued growth, though perhaps at more moderate levels than historically seen. The successful navigation of regulatory challenges and continued innovation in payment technologies will be crucial for maintaining Visa's market leadership and sustaining its premium valuation.

The company's recent 13% increase in quarterly dividend demonstrates confidence in its cash flow generation capabilities. Visa's robust margins and scalable business model continue to provide defensive characteristics during economic uncertainty. However, the DOJ lawsuit outcome could significantly impact its U.S. operations, making international expansion and digital innovation increasingly important for future growth.

Analyst Commentary 

Investment firms maintain a generally positive outlook on Visa despite regulatory challenges. BMO Capital Markets raised their price target to $320, citing relief that 2025 guidance didn't show significant deceleration. Morgan Stanley remains overweight, emphasizing consistent spending trends and faster growth in new revenue streams. JPMorgan highlights the company's stable quarter and interesting growth acceleration pattern through 2025. The consensus view suggests that while regulatory overhang exists, Visa's fundamental business strength and diverse revenue streams provide adequate support for continued growth.

Valuation

We based our projections on historical averages and company projections, while accounting for ongoing DOJ trial and lower operating margin. This results in a 10% revenue growth and a 60% operating margin across the 5-year forecast. Considering the substantial influence of terminal value in DCF analysis, especially for shorter forecast periods, we’ve applied a conservative 5.5% revenue growth and a reduced 9% terminal WACC (up from the 8.4% used in forecast years).

Under these assumptions, our model suggests an intrinsic value of $351.14 per share, indicating an upside of 11.57% to current share price. It’s important to note the high sensitivity of DCF-derived intrinsic values to input assumptions. Below, two sensitivity matrices illustrate different Operating Margin and Revenue Growth scenarios, as well as Terminal WACC and Terminal Revenue Growth variations.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

To assess Visa’s performance relative to its peers, we've created a peer group of four companies with similar growth potential and pace: Mastercard, American Express, Coinbase and Fiserv. Nvidia stands above the peer group average across several key metrics, as indicated by the mean, median, and cap-weighted multiples we calculated.

Three separate valuations for Visa, based on these multiples, show mixed results. While the P/E and forward P/E ratios suggest the stock might be undervalued, the P/S and EV/Sales ratios indicate potential downside. This combination of metrics suggests Visa could present an attractive opportunity compared to its peers, depending on the valuation approach. What is also noteworthy is that Visa maintains lower multiples than the peer group results.

Source: Bloomberg Finance LP, XTB Research

Recommendations: Visa has 48 recommendations, with 39 "buy" and highest price of $360, 8 “hold” and one “sell” with the price of $272. The 12-month average stock price forecast is $326.9, implying a 3.9% upside potential from the current price.

Technical analysis (Weekly interval): 

The stock has successfully broken through the resistance at the 161.8% Fibonacci retracement level from the September selloff. On the weekly interval, the RSI is nearing the overbought zone, where previous advancements into this area have historically triggered bullish price action. The MACD also signals bullish momentum, but its rapid extension may serve as a warning of potential overextension.

For bears, the key level to watch is the mid-September high around $293. A successful retest of this level could increase selling pressure and challenge the current bullish trend. Source: xStation