If you listened to the mainstream financial news networks, you would be forgiven for thinking that a softening economy, higher inflation, and rising interest rates had crushed the consumer and that spending was on the verge of a titanic plunge. But if that’s all true why is Visa down by a small single digit percentage for the year while the S&P 500 is down almost 3x as much?
The truth is Visa, a Buffett favorite, has an enviable business model with a massive moat. Visa depends on transaction fees not interest on credit card debt to generate its cash flows, which are significant. The company enjoys large margins – its gross margin has not fallen below 96% for the past 5 years – and impressive revenue growth, other than during 2020.
Top Line Growth Better Than It Seems
It is notable that in spite of the headwinds economically, Visa’s CFO has stated the company is “seeing no evidence of a pullback in consumer spending” for its fiscal Q4.
Indeed, a look back over the past five years reveals impressive revenue growth, with the COVID era the only blip.
- 2017: 21.7%
- 2018: 12.3%
- 2019: 11.5%
- 2020: -4.9%
- 2021: 10.3%
On a year over year basis, the outstanding top line growth is evident:
- 2021 Q2: 26.7%
- 2021 Q3: 28.6%
- 2021 Q4: 24.1%
- 2022 Q1: 25.5%
- 2022 Q2: 18.7%
A cursory glance at revenues would lead a casual observer to see “just” 10% growth in 2021 but the reality is revenue growth through most quarters in 2021 and all of 2022 thus far has been much more rapid. That acceleration in growth cannot be overstated. It shows that Visa is not suffering the effects of a weaker economy.
In its most recent quarter, the growth pop is attributable to a 40% rise in volume cross-border, a sign that travel has increased substantially.
Why Visa Is So Attractive To Buffett?
Together with Mastercard, Visa enjoys duopoly status. That allows it to operate with an asset-light model featuring low overheads. It’s notable that mobile financial technology platforms like Block and Paypal rely on these duopoly players.
The company’s business model is so operationally efficient that it produces massive cash flows. Since 2017 Cash Flow from Operation has mushroomed higher:
- 2017: $9.3 billion
- 2018: $12.9 billion
- 2019: $12.7 billion
- 2020: $10.4 billion
- 2021: $15.2 billion
Profit margins are north of 50% and operating margins are north of 65%. But the good news doesn’t stop there. The revenue forecasts according to the Street are astonishing:
- FY 2022: $29.0 billion
- FY 2023: $32.4 billion
- FY 2024: $36.5 billion
- FY 2025: $40.5 billion
- FY 2026: $45.3 billion
Other positives are a 14 year streak of dividend payments, a payout ratio of just 21.27% and a dividend yield of 0.73%.
On the all-important issue of valuation, Visa still has upside of almost 25% according to Wall Street. The consensus estimate across 32 analysts is for Visa to hit fair value at $256.19.
Even if they are not exactly spot on, investors have a significant margin of safety. From our number-crunching, the stock isn’t as cheap as we would like in order to get very enthusiastic but for such a strong performer in a down market with significant revenue growth potential on the horizon, it’s an enticing play that’s quite appetizing.