The Henry Fund Investment Thesis On Visa Inc (V) by

Visa Inc – Investment Thesis

Visa Inc We recommend a BUY for Visa Inc. (V), with approximately 29% upside. Visa is well positioned to benefit from the progressively cashless consumer and the technological advancements associated with this shift. The Visa Europe acquisition will contribute positive growth through a larger international presence, higher payments volume and an increase in processed transactions. Visa’s strong economic moats, via its network value proposition, scalability and strong brand equity, will widen – sustaining its competitive advantage and high profit margins for many years to come.

Drivers of Thesis

  • Over the next 8 years, the increase in non-cash transactions will outpace previous years, growing at a 10.47% CAGR; Visa will capture enough of this growth to boost its payments volume by 7.5% YOY, ultimately leading to an overall revenue CAGR of 8.64%.
  • Visa’s partnerships with tech companies, along with its own technological developments, will enable it to insert itself in more transactions to the tune of an 8.98% CAGR in processed transactions from now until 2023.
  • The Visa Europe acquisition will add at least 18B processed transactions and bring 1 out of every 5.70 Euros spent in Europe onto Visa’s network. Such additions will increase Visa’s market share to above 60%, thereby improving its revenue growth prospects.
  • Visa’s brand, scalability, unique network and value proposition make it the most ubiquitous payments resource for consumers, merchants, and issuer banks alike. Such economic moats will help Visa increase revenue growth, while maintaining a stable and lean cost structure, culminating in continued high operating margins (approximately 66%).

Risks to Thesis

  • Non-cash growth rate could stagnate or decelerate, causing Visa’s payments volume and resulting revenues to not meet expectations.
  • The Visa Europe acquisition could fall through or not have the expected positive impact on Visa’s growth prospects.
  • Consumers could use non-network payments companies, such as PayPal, more than expected, thus bypassing Visa’s network.

Visa Inc

Executive Summary

Visa is the market-leader in the very profitable credit card networks industry. However, industry may be generous as, Visa and MasterCard are the only two open-loop networks in the world, and thus make-up a stable and lucrative duopoly. Visa is well-positioned to further increase its market leadership, as we expect it to increase its market share of non-cash transactions, from 58% to 64% by 2017.

The main reasons Visa will be able to increase its market share are: the rise in non-cash transactions globally, the Visa Europe acquisition, internal technological innovation, external partnerships and investments in technology, and strengthening the economic moats that surround its profitability.

Visa’s innovation, unique network, and scalability enable it to peerlessly serve the three most important parties in the payments domain: consumers, issuers, and merchants. Moreover, Visa’s extremely high brand equity fosters a strong relationship of trust and loyalty among these three segments. Thus, Visa has developed, and will continue to sustain, a competitive advantage that leads to profit margins in the 65% range.

As such, Visa represents an investment opportunity in a profitable, nimble, and creative market leader. Specifically, we believe Visa’s stock currently has an intrinsic value of $91. This represents approximately 29% upside relative to its current market price of $70.62, hence our BUY recommendation.

Company Description

Visa is a global payments technology company that aims to “accelerate the electronification of commerce.”i Visa works to achieve this aim through operation of its open loop network, VisaNet, which provides the payment rails for consumers, businesses, and financial institutions to transfer electronic payments.

To clarify, an open loop network differs from a closed loop network, as closed loop networks (i.e., American Express and Discover) can extend credit and/or issue payment products directly, thereby excluding 3rd party issuers and/or acquirers. Issuers are financial institutions that provide payment cards directly to consumers and acquirers are financial institutions that process card payments on behalf of a merchant.

Hence, Visa, as an open loop network, does not issue payment products, extend credit, or set rates, and thus, does not bear credit risk. Rather, Visa signs long-term contracts with issuers that allow the institutions to offer Visa branded payment products to merchants and consumers. This greatly simplifies Visa’s business model, allowing it to focus on its 3 primary sources of revenue.

Visa Inc

How Visa Makes Money

Due to its relatively simple business model, Visa only has one reportable segment: Payment Services. Within this segment, Visa has the following revenue streams: service, data processing, and international transactions.

Visa Inc

Service revenues stem from Visa’s contracts with its issuer clients and the volume of payments using Visa-branded products.ii However, payments volume, or the total amount of money that flows through Visa’s network, is the primary driver. Hence, service revenues can be thought of the money Visa makes every time someone “swipes” a Visa card – either physically or electronically through a mobile app or a computer.

The frequency of such swipes is important too because Visa makes money every time one of its products is used. Visa’s service revenue yield is the percentage of payments volume that translates into revenue. The greater frequency of swipes, the higher percentage of yield.

The recently announced acquisition of Visa Europe, consumers’ continued transition away from cash and Visa’s ability to harness technological developments all bode well for Visa’s payments volume growth going forward. Specifically, we model Visa’s payments volume averaging just above 7.5% growth YOY from 2016-2023, in line with its historical rate of approx. 8%.

Visa Inc

Additionally, the declining trend in non-cash transaction (i.e., transactions excluding cash withdrawals from an ATM with a Visa) size is another good sign for Visa’s service revenue growth. Per the most recent data, transaction size decreased by nearly 1.75% from 2012-2014. This shows that people are using credit/debit cards increasingly for smaller transactions such as parking or taxi rides, which makes sense given today’s increasingly cashless world.

Visa Inc

This trend is a good sign: as the payments volume increases, but the size of non-cash transactions decreases, swipes occur at a greater frequency.

This in turn should raise Visa’s service revenue yield. Accordingly, we foresee Visa’s 2016-2023 service revenue yield CAGR outperforming its historical pace by about 15 basis points.

Visa Inc

Data processing revenues are based on authorization, clearing, settlement, and other services related to transaction and information processing. Put differently, this is the money Visa makes when it is directly involved with the transaction’s information flow. The number of Visa processed transactions drives these revenues.iii Looking ahead, Visa’s internal technological innovation, as well as its leverage of external technological advancement, have put Visa in strong position to process more transactions.

More immediately, Visa Europe will add at least 18B in processed transactions to Visa’s network – most likely in 2017 as the deal is expected to close in the latter half of 2016.iv Hence our forecast of approximately 90B processed transactions in 2017, versus 71B in 2015. This acquisitive accretion and our expected

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