V - Visa

[mranski]

Watched a 5 minute podcast called Card-maggedon with Interac ceo Mark O’Connell on Fin Post Canada. He is predicting the demise of the credit card more than I would have thought. Also he is confirming active blockchain review. I thought it was pretty good.

[Liberty]

Piece on Visa, MasterCard and Paypal:

 

https://www.barrons.com/articles/visa-mastercard-paypal-digital-payments-51558670403

[StubbleJumper]

Piece on Visa, MasterCard and Paypal:

 

https://www.barrons.com/articles/visa-mastercard-paypal-digital-payments-51558670403

 

 

Interesting article.  What is too rarely discussed in these sorts of articles is the relative importance of extending credit.  The focus is all on the point-of-sale transaction, but there's been plenty of POS competition from bank cards going back a couple of decades.  But, the credit card companies have always done something that the debit cards couldn't and that Apple or PayPal won't do, which is issue credit.  Of all the credit card transactions that are completed every month, how many are actually repaid in full at the end of the month to avoid incurring interest?  How many consumers go a whole year without ever carrying a credit card balance?  To me, that's why Apple Pay or PayPal cannot replicate the CC industry...it's got nothing to do with the back-office payment mechanics, and everything to do with the ability to extend credit.

 

 

SJ

[abitofvalue]

But extending credit is a very very cyclical business.  Investors don't like it (see various cc operators trading at 8x).  Heck PayPal sold it's credit business  in part because investors didn't like the exposure to credit.. 

[Spekulatius]

But extending credit is a very very cyclical business.  Investors don't like it (see various cc operators trading at 8x).  Heck PayPal sold it's credit business  in part because investors didn't like the exposure to credit..

 

I wonder how cyclical some highly valued tech business will be. Uber/Lyft/ Ubereats/ Airbnb is all discretionary spending. Pay for Dropbox (insert your favorite subscription service here ). - replace with a similar free offering. SQ - dependent on restaurant and small business which are highly vulnerable in a recession. GOOG and FB are all about advertising which moves with GNP.

 

Then the whole tech startup economy - Wework- short term leases with long term lease liabilities. The list goes on.... A lot of things that are taken for grant in a long upturn really isn’t.

[SHDL]

I wonder how cyclical some highly valued tech business will be. Uber/Lyft/ Ubereats/ Airbnb is all discretionary spending. Pay for Dropbox (insert your favorite subscription service here ). - replace with a similar free offering. SQ - dependent on restaurant and small business which are highly vulnerable in a recession. GOOG and FB are all about advertising which moves with GNP.

 

Then the whole tech startup economy - Wework- short term leases with long term lease liabilities. The list goes on.... A lot of things that are taken for grant in a long upturn really isn’t.

 

Yup.  And the operating leverage...  It was a lot of fun on the way up though.

[StubbleJumper]

But extending credit is a very very cyclical business.  Investors don't like it (see various cc operators trading at 8x).  Heck PayPal sold it's credit business  in part because investors didn't like the exposure to credit..

 

 

Well, that's the beauty of Visa and Mastercard.  Effectively, they don't extend credit, they just benefit from the merchant fees when banks extend credit.  But, when Apple Pay or PayPal try to compete in point of sale transactions, a large segment of the population needs to fund their purchase from their credit card because they are chronically broke.  For those people, there's not much reason to not just use their CC directly instead of buggering around with a third-party payment service.

 

 

SJ

[Jerry Capital]

Mind boggling how few people understand the payments space... explains the stock prices

[tripleoptician]

Mind boggling how few people understand the payments space... explains the stock prices

 

Can you recommend any good primers to improve understanding of the payments space?

Thanks in advance

 

[Jerry Capital]

I posted something in the thread that explains the basic that you need to answer the questions "how does $V & $MA make money"

 

but i would suggest pretending like you are trying to start your own store and go through the thought process.

 

Do a porters five forces

 

draw out he payment flow in the four-party model, everytime you see a new form of payment, redraw the model, how does the four-party model change with ApplePay versus tap to pay credit?

 

Braintree has a good glossary

 

https://articles.braintreepayments.com/

https://www.braintreepayments.com/blog/definitions-for-the-payment-processing-industry/

[SlowAppreciation]

Mind boggling how few people understand the payments space... explains the stock prices

 

Can you recommend any good primers to improve understanding of the payments space?

Thanks in advance

 

I found that understanding the history of the payment industry was a big help in understanding the way it is today.

 

Here are some good sources to get you started:

• A Piece of the Action: How the Middle Class Joined the Money Class (https://amzn.to/2TccsNP)
  
• One from Many: VISA and the Rise of Chaordic Organization (https://amzn.to/2PYJEd8)
  
• Payments Industry Overview (http://valueseekerinvestments.blogspot.com/2017/05/payments-industry-overview-analysis-of.html)
  
• Clearing and Settlement of Interbank Card Transactions: A MasterCard Tutorial for Federal Reserve Payments Analysts (https://www.philadelphiafed.org/-/media/consumer-finance-institute/payment-cards-center/publications/discussion-papers/2013/D-2013-October-Clearing-Settlement.pdf)
  
• Think of it as Money (https://www.era.lib.ed.ac.uk/bitstream/1842/2672/1/Stearns%20DL%20thesis%2007.pdf)
  
• Mastercard - Value Investors Club (https://valueinvestorsclub.com/idea/MASTERCARD_INC/8364047179)
  
• Paying with Plastic: The Digital Revolution in Buying and Borrowing (https://amzn.to/2qHyYRO)
  
• Payments Systems in the U.S. - Third Edition: A Guide for the Payments Professional (https://amzn.to/2Flljdo)
  
• Financing the American Dream (https://amzn.to/2DEhRZL)
  
• VISA: The Power of an Idea (https://amzn.to/2FgcnWy)
  
• Electronic Value Exchange:Origins of the VISA Electronic Payment System (https://amzn.to/2RFOGMh)
  
• Meet the New Payment Champions, Same as the Old Ones (https://www.wsj.com/articles/meet-the-new-payment-champions-same-as-the-old-ones-11547202620)
  
• Purchases With Plastic Get Costlier for Merchants—and Consumers (https://www.wsj.com/articles/purchases-with-plastic-get-costlier-for-merchantsand-consumers-11550226601?mod=mhp)
  
• BLS Capital - Visa (http://www.blscapital.dk/en/company/visa-2/)
  
• I put together a small writeup as well: http://minesafetydisclosures.com/blog/2019/5/29/part-l-a-history-of-visa
  

[Casey]

Mind boggling how few people understand the payments space... explains the stock prices

 

At what price do you think it would be fairly valued, and at what point would you be buying a lot?

 

To the extent that there is a discount, do you think it's because their moat and growth would vanish "all at once" in a way that's hard to anticipate?

[Liberty]

I put together a small writeup as well: http://minesafetydisclosures.com/blog/2019/5/29/part-l-a-history-of-visa

 

 

He's too modest, so he buried it at the end, but check this out.

[SHDL]

I put together a small writeup as well: http://minesafetydisclosures.com/blog/2019/5/29/part-l-a-history-of-visa

 

 

He's too modest, so he buried it at the end, but check this out.

 

Yes, this deserves to be more prominently displayed.  Looking forward to Part 2!

[rranjan]

I put together a small writeup as well: http://minesafetydisclosures.com/blog/2019/5/29/part-l-a-history-of-visa

 

 

He's too modest, so he buried it at the end, but check this out.

 

+1

 

Very well written. 2nd part?

[SlowAppreciation]

I put together a small writeup as well: http://minesafetydisclosures.com/blog/2019/5/29/part-l-a-history-of-visa

 

 

He's too modest, so he buried it at the end, but check this out.

 

+1

 

Very well written. 2nd part?

 

Thanks all. 2nd part probably sometime next week.

[Nomad]

I get that Visa is a great business - but so does everybody else. At 17x revenues, where's the mispricing here?

 

How is this not simply a 2019 iteration of the "can't miss" Nifty Fifty companies?

[Liberty]

I get that Visa is a great business - but so does everybody else. At 17x revenues, where's the mispricing here?

 

How is this not simply a 2019 iteration of the "can't miss" Nifty Fifty companies?

 

Why is revenue the right metric here, especially for a company with close to 70% EBITDA margins?

 

Around 3-3.5% FCF yield on a business of this quality growing double digits with a pretty big runway (cash is still a huge portion of transactions around the world) and new opportunities thanks to technology (lots of new entrants building on top of Visa and MA rails, like Square and Apple Pay and Paypal/Venmo and such). Not to mention that Visa Europe is still under-earning.

[Nomad]

 

Why is revenue the right metric here, especially for a company with close to 70% EBITDA margins?

 

Around 3-3.5% FCF yield on a business of this quality growing double digits with a pretty big runway (cash is still a huge portion of transactions around the world) and new opportunities thanks to technology (lots of new entrants building on top of Visa and MA rails, like Square and Apple Pay and Paypal/Venmo and such). Not to mention that Visa Europe is still under-earning.

 

All of that makes a lot of sense, and I have looked at Visa as a long-term holding, but I haven't been able to justify a purchase as V seems priced for perfection on nearly every available metric.

 

While I agree that cashless payments have a long runway, I'm uncertain that Visa ends up capturing much of that value. What's to stop other emerging economies from following the Chinese development model and locking V out of their markets to create local UnionPay / AliPay clones? Even in an "open" competitive environment, the risk of disruption is already present. For example, Africa has already developed alternatives to the MA/V duopoly. In Kenya, for example, you can pay anyone you want - including merchants - with the Mpesa system by simply sending them a text message.

 

Payments volumes tend to track economic activity, and future growth in FCF is ultimately dependent on V maintaining its strong margins (not necessarily a given depending on the regulatory climate in the US/EU and the need to invest in additional capacity to support continued international growth).

 

I do think that Visa - at present - is a great business. I just tend to think that the market has more than priced in the growth story that you allude to and that there's little margin of safety here should the company fail to deliver on the market's already sky-high expectations.  However, I have been burned badly on "story" stocks in the past so I am willing to admit that some of my hesitation could be due to cognitive bias (cat sits on a hot stove so it never again sits on a cold one, etc.). Very curious to see how this one develops.

[Liberty]

How is it priced for perfection? When the market is selling for close to 20x, a company of much higher quality (ROIC, ROE, margins, moat, runway) than the index selling for around 30x isn't that expensive.

 

China kept Visa and MA out, so that left space for TCEHY and BABA to create their own rails. The rest of the world already has Visa and MA rails, they're reliable, ubiquitous, and cost 15bps (most of the costs are from the issuer banks, and if some fees are reduced, that's likely where, since you could cut the processor fees in half and it wouldn't even be noticed by consumers). Cash is more expensive than that, when you take into account security costs. Very hard to compete with, which is why almost all new payment tech of the past few years has been built on top of it.

[Spekulatius]

How is it priced for perfection? When the market is selling for close to 20x, a company of much higher quality (ROIC, ROE, margins, moat, runway) than the index selling for around 30x isn't that expensive.

 

China kept Visa and MA out, so that left space for TCEHY and BABA to create their own rails. The rest of the world already has Visa and MA rails, they're reliable, ubiquitous, and cost 15bps (most of the costs are from the issuer banks, and if some fees are reduced, that's likely where, since you could cut the processor fees in half and it wouldn't even be noticed by consumers). Cash is more expensive than that, when you take into account security costs. Very hard to compete with, which is why almost all new payment tech of the past few years has been built on top of it.

 

In order for V and MC to work out, you need to assume that no new rails are going to be build in the foreseeable future. Any new rail in payments is probably going to force lower pricing, so even a smallish market share may impair their value quite a bit.

With the ascend of tech titans like FB, Google, Apple who own the customer relationship and can have instant scale, this scenario has become quite more likely, imo. It hasn’t happened yet, because existing rails work quite well and it’s cheap enough that competitions don’t bother, or had easier target markets to go after. However, I think the tech is not a hurdle any more. One addition vector of attack could bento purchase an existing rail like Discover. Discover also works in China.

Work quite well

[abitofvalue]

How is it priced for perfection? When the market is selling for close to 20x, a company of much higher quality (ROIC, ROE, margins, moat, runway) than the index selling for around 30x isn't that expensive.

 

China kept Visa and MA out, so that left space for TCEHY and BABA to create their own rails. The rest of the world already has Visa and MA rails, they're reliable, ubiquitous, and cost 15bps (most of the costs are from the issuer banks, and if some fees are reduced, that's likely where, since you could cut the processor fees in half and it wouldn't even be noticed by consumers). Cash is more expensive than that, when you take into account security costs. Very hard to compete with, which is why almost all new payment tech of the past few years has been built on top of it.

 

 

 

 

In order for V and MC to work out, you need to assume that no new rails are going to be build in the foreseeable future. Any new rail in payments is probably going to force lower pricing, so even a smallish market share may impair their value quite a bit.

With the ascend of tech titans like FB, Google, Apple who own the customer relationship and can have instant scale, this scenario has become quite more likely, imo. It hasn’t happened yet, because existing rails work quite well and it’s cheap enough that competitions don’t bother, or had easier target markets to go after. However, I think the tech is not a hurdle any more. One addition vector of attack could bento purchase an existing rail like Discover. Discover also works in China.

Work quite well

 

 

Discover works in China because of its agreement with China UnionPay. Discover doesnt have its own network there. You think CUP keeps that relationship going if a tech giant buys Discover? The whole national champion payment system movement is because they wnt V/MA (american companies) controlling payments. dont think it will be diff for a tech owner.

 

In addition to V/MA being there, the other big problem is scale. Payments is a scale business. China didnt have V/MA and had scale so its networks could be built. India had V/MA but not well penetrated and certainly can build scale so RuPay made some sense.  That said, most leading banks (the ones that cater to upper middle class Indian consumers) have stuck with V/MA vs RuPay for a number of reasons including better perceived global acceptance, brand value and prob some special economics (so yes there is pricing pressure from RUpAY).

 

think the relative lack of success PayPal had disintermediating V/MA was telling. Eventually, partnering with them is just easier, more profitable and imo to be the path the apple, fb, googl to partner with tthem.  The one area that could be concerning though i think is if enough volume is taken off rails through some of these tech-enabled networks such that it never flows through V, MA, banks etc. but i am not sure there is enough incentive for any one party to attempt to do that.

 

[Liberty]

How is it priced for perfection? When the market is selling for close to 20x, a company of much higher quality (ROIC, ROE, margins, moat, runway) than the index selling for around 30x isn't that expensive.

 

China kept Visa and MA out, so that left space for TCEHY and BABA to create their own rails. The rest of the world already has Visa and MA rails, they're reliable, ubiquitous, and cost 15bps (most of the costs are from the issuer banks, and if some fees are reduced, that's likely where, since you could cut the processor fees in half and it wouldn't even be noticed by consumers). Cash is more expensive than that, when you take into account security costs. Very hard to compete with, which is why almost all new payment tech of the past few years has been built on top of it.

 

In order for V and MC to work out, you need to assume that no new rails are going to be build in the foreseeable future. Any new rail in payments is probably going to force lower pricing, so even a smallish market share may impair their value quite a bit.

With the ascend of tech titans like FB, Google, Apple who own the customer relationship and can have instant scale, this scenario has become quite more likely, imo. It hasn’t happened yet, because existing rails work quite well and it’s cheap enough that competitions don’t bother, or had easier target markets to go after. However, I think the tech is not a hurdle any more. One addition vector of attack could bento purchase an existing rail like Discover. Discover also works in China.

Work quite well

 

Everybody seems to think that doing what V and MA is doing is easy, eh?

 

I'm sure that Apple and Facebook really need to deal with fraud on billions of transactions and deal tens of millions of point-of-sales, at reliabilities that are incredibly high, and losing money for years since before you reach scale you can't make money at 15bps (or less). And even if they charged 5 bps, would anyone notice and switch because of that?

 

That's why Apple Pay runs on visa rails and the Apple Card runs on Mastercard rails. Because they want to focus on where they can add value -- the user experience -- rather than on overbuilding already existing massively complex infrastructure that would take years and years and years to get anywhere.

 

I'm sure some will try to move some things over to their own rails and such, there's always competition, but the stock isn't priced at 200x, it's 30x for a business growing organically at 15-20% and needs basically no capital to grow at close to 100% incremental margins. Not that demanding. I know a lot of lesser businesses that are a lot more expensive.

[Spekulatius]

How is it priced for perfection? When the market is selling for close to 20x, a company of much higher quality (ROIC, ROE, margins, moat, runway) than the index selling for around 30x isn't that expensive.

 

China kept Visa and MA out, so that left space for TCEHY and BABA to create their own rails. The rest of the world already has Visa and MA rails, they're reliable, ubiquitous, and cost 15bps (most of the costs are from the issuer banks, and if some fees are reduced, that's likely where, since you could cut the processor fees in half and it wouldn't even be noticed by consumers). Cash is more expensive than that, when you take into account security costs. Very hard to compete with, which is why almost all new payment tech of the past few years has been built on top of it.

 

In order for V and MC to work out, you need to assume that no new rails are going to be build in the foreseeable future. Any new rail in payments is probably going to force lower pricing, so even a smallish market share may impair their value quite a bit.

With the ascend of tech titans like FB, Google, Apple who own the customer relationship and can have instant scale, this scenario has become quite more likely, imo. It hasn’t happened yet, because existing rails work quite well and it’s cheap enough that competitions don’t bother, or had easier target markets to go after. However, I think the tech is not a hurdle any more. One addition vector of attack could bento purchase an existing rail like Discover. Discover also works in China.

Work quite well

 

Everybody seems to think that doing what V and MA is doing is easy, eh?

 

I'm sure that Apple and Facebook really need to deal with fraud on billions of transactions and deal tens of millions of point-of-sales, at reliabilities that are incredibly high, and losing money for years since before you reach scale you can't make money at 15bps (or less). And even if they charged 5 bps, would anyone notice and switch because of that?

 

That's why Apple Pay runs on visa rails and the Apple Card runs on Mastercard rails. Because they want to focus on where they can add value -- the user experience -- rather than on overbuilding already existing massively complex infrastructure that would take years and years and years to get anywhere.

 

I'm sure some will try to move some things over to their own rails and such, there's always competition, but the stock isn't priced at 200x, it's 30x for a business growing organically at 15-20% and needs basically no capital to grow at close to 100% incremental margins. Not that demanding. I know a lot of lesser businesses that are a lot more expensive.

 

Organic revenue growth for V is probably around 10% going forward, which makes a 30x PE sort of expensive. Margins can’t increase forever.

[Jerry Capital]

2009 V is expensive

2010 V is expensive

2011 V is expensive

2012 V is expensive

2013 V is expensive

2014 V is expensive

2015 V is expensive

2016 V is expensive

2017 V is expensive

2018 V is expensive

2019 V is expensive

2020 V is expensive......

 

maybe it was cheap all along and youre assumptions were wrong?