V - Visa

[RuleNumberOne]

I think this could get disrupted by a Robinhood or Schwab-like bank-wannabe. Robinhood wanted to attract deposits with its 3% checking account. Instead it could get merchants to open checking accounts by giving them a payment device that accepts payments from Robinhood apps.

 

There is a big pricing gap with current credit cards. Even though V and MA take 20bps, the merchants probably pay out 3-5% to card companies, consumers get 1-2% in rewards.

 

Well-funded startups like an Uber are the most likely disruptors in a space like this one.

[Jerry Capital]

No.

[Liberty]

 

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

 

What's your math here? Organic growth alone isn't enough to know if 30x is expensive. If you get 10% growth at ridiculously high ROIC and incremental margins, don't need capital so you buy back shares with FCF, the leverage going down from the top line to the bottom line can easily mean that per share value increases 15-20%, and if the terminal value is high, 30x can easily be a bargain.

[Liberty]

I think this could get disrupted by a Robinhood or Schwab-like bank-wannabe. Robinhood wanted to attract deposits with its 3% checking account. Instead it could get merchants to open checking accounts by giving them a payment device that accepts payments from Robinhood apps.

 

There is a big pricing gap with current credit cards. Even though V and MA take 20bps, the merchants probably pay out 3-5% to card companies, consumers get 1-2% in rewards.

 

Well-funded startups like an Uber are the most likely disruptors in a space like this one.

 

Zero chance of that happening. Maybe some of the issuing banks get pressured, but the underlying rails won't be touched by that.

[Spekulatius]

 

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

 

What's your math here? Organic growth alone isn't enough to know if 30x is expensive. If you get 10% growth at ridiculously high ROIC and incremental margins, don't need capital so you buy back shares with FCF, the leverage going down from the top line to the bottom line can easily mean that per share value increases 15-20%, and if the terminal value is high, 30x can easily be a bargain.

 

If V has a 3% FCF yield, then they can buy back 3% of their shares annually, so that gets you 13 % earnings growth/ share, unless they increase margins ( which are already quite high) or lever up ( which at these multiples isn’t all that impactful either.

The big issue is how long the current economics persist or to frame it in other terms what the exit multiple will be in 5 or 10 years.

 

I do agree that Robin Hood, Uber and the likes more likely use Visa/ MC‘s infrastructure. I believe the bigger risk is completion from new Entries like Amazon, Apple, FB, Google who know a lot about their customers and surely can create an alternative infrastructure. Alternative rails already exist- Discover can be bought for just $25B and trades for less than 9x earnings. A deep pocketed buyer could get instant scale, then overlay a better tech and then probably be up and running. The combined Market cap of MA and V is $600B, so it certainly is an attractive market.

[SlowAppreciation]

1. Will transaction and payment volume continue to grow at the same rates in the future?

 

 

I believe yes, because of:

• Natural increase in worldwide economic growth (+inflation)
  
• Shift to E-commerce
  
• Shift from cash to electronic
  
• Shift of B2B, G2C, B2C, C2C, etc to electronic
  
• All new entrants rely on existing rails
  

 

2. And over time, will it get cheaper or more expensive to process those transactions?

 

[Liberty]

 

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

 

What's your math here? Organic growth alone isn't enough to know if 30x is expensive. If you get 10% growth at ridiculously high ROIC and incremental margins, don't need capital so you buy back shares with FCF, the leverage going down from the top line to the bottom line can easily mean that per share value increases 15-20%, and if the terminal value is high, 30x can easily be a bargain.

 

If V has a 3% FCF yield, then they can buy back 3% of their shares annually, so that gets you 13 % earnings growth/ share, unless they increase margins ( which are already quite high) or lever up ( which at these multiples isn’t all that impactful either.

The big issue is how long the current economics persist or to frame it in other terms what the exit multiple will be in 5 or 10 years.

 

I do agree that Robin Hood, Uber and the likes more likely use Visa/ MC‘s infrastructure. I believe the bigger risk is completion from new Entries like Amazon, Apple, FB, Google who know a lot about their customers and surely can create an alternative infrastructure. Alternative rails already exist- Discover can be bought for just $25B and trades for less than 9x earnings. A deep pocketed buyer could get instant scale, then overlay a better tech and then probably be up and running. The combined Market cap of MA and V is $600B, so it certainly is an attractive market.

 

Feel free to short it if you think it's priced for perfection and it's that easy for someone to get their own rails.

 

Personally, I wouldn't be surprised if they kept growing earnings per share at 15%+ for a while. Visa Europe is under-earning and it'll take many years to bring it to the level of the rest of the company, and there's still a lot of cash being used for transactions around the world that is going digital over time, and recently Visa has made moves to get a lot of ACH/direct-deposit-type transactions over its rails (faster, safer, cheaper), so that's a few more trillions in potential transactions to add to the mix. Add to that B2B growing fast, where trillions are being moved between companies still with paper cheques, and that's starting to switch over to digital.

[peterHK]

 

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

 

What's your math here? Organic growth alone isn't enough to know if 30x is expensive. If you get 10% growth at ridiculously high ROIC and incremental margins, don't need capital so you buy back shares with FCF, the leverage going down from the top line to the bottom line can easily mean that per share value increases 15-20%, and if the terminal value is high, 30x can easily be a bargain.

 

If V has a 3% FCF yield, then they can buy back 3% of their shares annually, so that gets you 13 % earnings growth/ share, unless they increase margins ( which are already quite high) or lever up ( which at these multiples isn’t all that impactful either.

The big issue is how long the current economics persist or to frame it in other terms what the exit multiple will be in 5 or 10 years.

 

I do agree that Robin Hood, Uber and the likes more likely use Visa/ MC‘s infrastructure. I believe the bigger risk is completion from new Entries like Amazon, Apple, FB, Google who know a lot about their customers and surely can create an alternative infrastructure. Alternative rails already exist- Discover can be bought for just $25B and trades for less than 9x earnings. A deep pocketed buyer could get instant scale, then overlay a better tech and then probably be up and running. The combined Market cap of MA and V is $600B, so it certainly is an attractive market.

 

Alternatives exist, but Discover is higher cost, and this is a business with network effects. I've never seen a merchant that accepts discover in my 27 years of life. As a consumer, it's useless to me. It's not about tech, it's about the network. Reading the history of Visa, for example, shows how challenging it is to get that network started.

 

The issue is what is the alternative infrastructure? Debit accounts don't have the consumption smoothing function like credit (you are forced to have wasting cash available; the alternative is high deposit costs if Amazon say were to give sufficient interest). Amazon and Apple don't want to be lenders, it's a shitty business. Blockchain or other tech largely works in a closed network, but isn't nearly as efficient for the settlement and security of outside payments.

 

So are Visa and MasterCard invincible? No. But the argument "someone else could come along" shows, I think, a poor understanding of what these businesses do and how hard it is to compete with them.

[peterHK]

It's also worth adding that if your incremental margins are 95% and you have 70% EBITDA margins now, margins CAN continue to rise as the business grows. It's pretty simple math there...

[RuleNumberOne]

If an enterpreneur like Travis Kalanick had gone after payments with $23 billion of cash, wouldn't he have succeeded?

 

To pay 30x, I would have to convince myself these are not disruptable.

 

Roku is used by 27 million US homes. Distributing universal card-readers to 27 million small businesses should not take that much capital. Each device would be cheaper than a Roku.

[Sharad]

If an enterpreneur like Travis Kalanick had gone after payments with $23 billion of cash, wouldn't he have succeeded?

 

To pay 30x, I would have to convince myself these are not disruptable.

 

Roku is used by 27 million US homes. Distributing universal card-readers to 27 million small businesses should not take that much capital. Each device would be cheaper than a Roku.

 

Square?

[jsgcapital13]

Alternatives exist, but Discover is higher cost, and this is a business with network effects. I've never seen a merchant that accepts discover in my 27 years of life. As a consumer, it's useless to me. It's not about tech, it's about the network. Reading the history of Visa, for example, shows how challenging it is to get that network started.

 

The issue is what is the alternative infrastructure? Debit accounts don't have the consumption smoothing function like credit (you are forced to have wasting cash available; the alternative is high deposit costs if Amazon say were to give sufficient interest). Amazon and Apple don't want to be lenders, it's a shitty business. Blockchain or other tech largely works in a closed network, but isn't nearly as efficient for the settlement and security of outside payments.

 

So are Visa and MasterCard invincible? No. But the argument "someone else could come along" shows, I think, a poor understanding of what these businesses do and how hard it is to compete with them.

 

what do you think is the best read to understand V/MA network and the challenges to scale?

 

[SlowAppreciation]

If an enterpreneur like Travis Kalanick had gone after payments with $23 billion of cash, wouldn't he have succeeded?

 

To pay 30x, I would have to convince myself these are not disruptable.

 

Roku is used by 27 million US homes. Distributing universal card-readers to 27 million small businesses should not take that much capital. Each device would be cheaper than a Roku.

 

It's not an insignificant amount of capital...

• Would it be integrated with the merchant's bank and the cardholder's bank?
  
• Would it work in real-time, with 100% uptime, and 0 significant data breaches?
  
• Would cardholder's banks supply credit and provide rewards for free?
  
• If yes, would cardholders use something that doesn't let them buy on credit or earn rewards? And would they spend as much at the merchant if they can't use credit?
  
• Would it integrate with hundreds of existing merchant POS systems/accounting software?
  
• Would it do real-time currency conversions?
  
• Would it be compliant with 150+ country's local laws, and regulatory bodies? (doubtful based on what we know about Travis Kalanick...)
  
• Would it be localized for hundreds of languages?
  

[coc]

If an enterpreneur like Travis Kalanick had gone after payments with $23 billion of cash, wouldn't he have succeeded?

 

To pay 30x, I would have to convince myself these are not disruptable.

 

Roku is used by 27 million US homes. Distributing universal card-readers to 27 million small businesses should not take that much capital. Each device would be cheaper than a Roku.

 

Distributing card readers has nothing to do with the disruption of V/MA. I’m offering this in good faith. Even Paypal, used by many tens of millions, goes over V/MA rails for the most part. So does Apple’s payment system, and Square. I’d investigate why that is.

 

Payment networks are very complex when you get down to it, and really hard to replicate. The “debit” part of it might be partially vulnerable, see the success of Venmo for some (relatively small) use cases, Paypal for some others, where you’re avoiding the V/MA system. But these are only domestic transactions, cash-to-cash. Most people I know, self included, use their credit card as a debit card with 30 days of float.

 

The credit side, I don’t know how you’d to touch it. They’re deeply integrated with the issuing and accepting banks. How would you even attempt to rip it out? And even if you came up with something, why would the banks go along with it, when V/MA work so well and charge so little? Even Amex is somewhat lucky to see their franchise still intact — it’s needed every inch of its “moat” in T&E and corporate cards to stay competitive.

 

If anyone has a cogent argument as to how/why this would be done, I’d actually love to hear it.

[Liberty]

If an enterpreneur like Travis Kalanick had gone after payments with $23 billion of cash, wouldn't he have succeeded?

 

To pay 30x, I would have to convince myself these are not disruptable.

 

Roku is used by 27 million US homes. Distributing universal card-readers to 27 million small businesses should not take that much capital. Each device would be cheaper than a Roku.

 

I'll take the other side. I don't think your assumptions are anything close to realistic.

[SlowAppreciation]

The “debit” part of it might be partially vulnerable, see the success of Venmo for some (relatively small) use cases, Paypal for some others, where you’re avoiding the V/MA system. But these are only domestic transactions, cash-to-cash. Most people I know, self included, use their credit card as a debit card with 30 days of float.

 

The credit side, I don’t know how you’d to touch it. They’re deeply integrated with the issuing and accepting banks. How would you even attempt to rip it out? And even if you came up with something, why would the banks go along with it, when V/MA work so well and charge so little? Even Amex is somewhat lucky to see their franchise still intact — it’s needed every inch of its “moat” in T&E and corporate cards to stay competitive.

 

If anyone has a cogent argument as to how/why this would be done, I’d actually love to hear it.

 

This is a good take. Many underestimate the value of extending short-term credit to hundreds of millions—if not billions—of consumers. Hard to argue the benefits to merchants isn't worth 200+ bps.

[Jurgis]

IMO you all are looking at risks wrong. The risk for V/MA is what drove their stocks down in the past: regulatory anti-trust fee restrictions. Look at where they traded under regulatory risk in the past and look at what's happening with GOOGL/FB nowadays.

 

Although I'm sure this won't stop bulls from seeing only blue sky

[Spekulatius]

IMO you all are looking at risks wrong. The risk for V/MA is what drove their stocks down in the past: regulatory anti-trust fee restrictions. Look at where they traded under regulatory risk in the past and look at what's happening with GOOGL/FB nowadays.

 

Although I'm sure this won't stop bulls from seeing only blue sky

 

Yep, FB and GOOG Trade at sub 20x PE ex cash and have higher organic growth rates than Visa or MasterCard. I was a buyer in GOOG today and I‘d argue it is a much better buy than both of the above right now. And with all quasi Oligopolies, the political risk is all to real.

 

[Liberty]

IMO you all are looking at risks wrong. The risk for V/MA is what drove their stocks down in the past: regulatory anti-trust fee restrictions. Look at where they traded under regulatory risk in the past and look at what's happening with GOOGL/FB nowadays.

 

Although I'm sure this won't stop bulls from seeing only blue sky

 

Show me a business without risk.

 

I love how the argument is now basically "well, it has risks!".

 

Yeah, sure. The point is to determine if the risk-reward looks good.

 

When you have 70% EBITDA margins and are capital light, just the fact that those kind of returns haven't been competed away is a pretty good indication that you have a serious moat. If you didn't, where are all the entrants attracted by those economics? Even American Express, which has been there from the start, hasn't been able to make much of a dent and do as well. MA and Visa got in the position where they are because they started out as coops, kind of like VRSK, and that put them in unique positions.

[dwy000]

IMO you all are looking at risks wrong. The risk for V/MA is what drove their stocks down in the past: regulatory anti-trust fee restrictions. Look at where they traded under regulatory risk in the past and look at what's happening with GOOGL/FB nowadays.

 

Although I'm sure this won't stop bulls from seeing only blue sky

 

Yep, FB and GOOG Trade at sub 20x PE ex cash and have higher organic growth rates than Visa or MasterCard. I was a buyer in GOOG today and I‘d argue it is a much better buy than both of the above right now. And with all quasi Oligopolies, the political risk is all to real.

 

I think that's right.  The risk isn't this not growing or going away in the next 5-10 years, it's that growth slows, margins get squeezed and it re-rates to 20x PE from 30x. 

[coc]

I agree with the commenter that the main risk is political / regulatory. But we’ve been through that (to some degree) and V/MA came out fine.

 

There’s a good reason why the banks get to keep 150bps or whatever it is on credit interchange. They are taking risk — of fraud, for example — which they pass much of it back in rewards, and they’re floating you money for a month. In exchange, merchants as a whole get people spending a lot more money than they would otherwise, if everything was cash, and don’t have to worry about getting paid. (Much to the chagrin of those who don’t like the explosion of consumer credit.)

 

V/MA keep 15-20 bps, not much in the overall context. What’s <$40 billion in combined revenue at V/MA to keep maybe $20 trillion of transactions running smoothly worldwide? It’s a drop in the bucket. There is a good reason the banks got together and did this over the years. It’s a sort of anomaly that they happen to be independent, public companies.

 

As for growth rates, arguably V/MA have longer runways to grow than either Google or Facebook. Their margins seem to be whatever they choose them to be - how would a squeeze come about? (Again, more than happy to be enlightened if I’m wrong.)

 

For the record, I’m in the “not a shareholder but should have been” camp.

[vinod1]

Longtime shareholder of both Visa and Mastercard. Other than brand name religions where some of the costs for the services are in the afterlife (you pay in the present world and the rewards are paid out after death in another universe), this industry is as good as it gets.

 

To take one aspect regarding fraud:

 

Visa and MasterCard have accumulated vast amounts of data over the years. They have historical data of all the places a card is used. They can provide in real-time (in milliseconds) fraud score on a transaction based on all this historical data whenever a card is being used. This significantly reduces fraud in the system. For example, if a person uses a gas station in a zip-code where they have never shopped before, Visa/MasterCard can flag this transaction for further verification.

 

In US, fraud losses are about 12 - 13¢ for every $100. These losses are split roughly 60/40 between issuers and merchants. The fees charged by the card networks of around 10 - 15¢ compares favorably to these losses. So both issuers and merchants have an incentive to stay with card networks that can minimize fraud losses. Any new entrant would start with a much smaller dataset and fraud screening would be less effective and fraud costs higher. New entrants thus are at a disadvantage and need to absorb higher losses for several years and are disadvantaged relative to Visa and MasterCard.

 

There are many such aspects to their competitive advantage.

 

The main risk as others have pointed out is regulatory. Disruption risk is much lower compared to the regulatory risk.  For disruption you need to have a pain point for some segment of the users that is going to be reduced (like Uber) with a new solution or there must be something that is vastly superior in functionality or usability (like iPhone).

 

The one area where I can think of is micropayments. For payments less than $2-3 amounts, the existing structure is very costly. If disruption occurs it might start here. V/MA can address this and take out the risk without losing all that much of their existing revenue.

 

Vinod

 

 

 

 

[coc]

Longtime shareholder of both Visa and Mastercard. Other than brand name religions where some of the costs for the services are in the afterlife (you pay in the present world and the rewards are paid out after death in another universe), this industry is as good as it gets.

 

To take one aspect regarding fraud:

 

Visa and MasterCard have accumulated vast amounts of data over the years. They have historical data of all the places a card is used. They can provide in real-time (in milliseconds) fraud score on a transaction based on all this historical data whenever a card is being used. This significantly reduces fraud in the system. For example, if a person uses a gas station in a zip-code where they have never shopped before, Visa/MasterCard can flag this transaction for further verification.

 

In US, fraud losses are about 12 - 13¢ for every $100. These losses are split roughly 60/40 between issuers and merchants. The fees charged by the card networks of around 10 - 15¢ compares favorably to these losses. So both issuers and merchants have an incentive to stay with card networks that can minimize fraud losses. Any new entrant would start with a much smaller dataset and fraud screening would be less effective and fraud costs higher. New entrants thus are at a disadvantage and need to absorb higher losses for several years and are disadvantaged relative to Visa and MasterCard.

 

There are many such aspects to their competitive advantage.

 

The main risk as others have pointed out is regulatory. Disruption risk is much lower compared to the regulatory risk.  For disruption you need to have a pain point for some segment of the users that is going to be reduced (like Uber) with a new solution or there must be something that is vastly superior in functionality or usability (like iPhone).

 

The one area where I can think of is micropayments. For payments less than $2-3 amounts, the existing structure is very costly. If disruption occurs it might start here. V/MA can address this and take out the risk without losing all that much of their existing revenue.

 

Vinod

 

Do you happen to have a source for the 12-13bps of fraud losses in the US? Thanks!

[vinod1]

Longtime shareholder of both Visa and Mastercard. Other than brand name religions where some of the costs for the services are in the afterlife (you pay in the present world and the rewards are paid out after death in another universe), this industry is as good as it gets.

 

To take one aspect regarding fraud:

 

Visa and MasterCard have accumulated vast amounts of data over the years. They have historical data of all the places a card is used. They can provide in real-time (in milliseconds) fraud score on a transaction based on all this historical data whenever a card is being used. This significantly reduces fraud in the system. For example, if a person uses a gas station in a zip-code where they have never shopped before, Visa/MasterCard can flag this transaction for further verification.

 

In US, fraud losses are about 12 - 13¢ for every $100. These losses are split roughly 60/40 between issuers and merchants. The fees charged by the card networks of around 10 - 15¢ compares favorably to these losses. So both issuers and merchants have an incentive to stay with card networks that can minimize fraud losses. Any new entrant would start with a much smaller dataset and fraud screening would be less effective and fraud costs higher. New entrants thus are at a disadvantage and need to absorb higher losses for several years and are disadvantaged relative to Visa and MasterCard.

 

There are many such aspects to their competitive advantage.

 

The main risk as others have pointed out is regulatory. Disruption risk is much lower compared to the regulatory risk.  For disruption you need to have a pain point for some segment of the users that is going to be reduced (like Uber) with a new solution or there must be something that is vastly superior in functionality or usability (like iPhone).

 

The one area where I can think of is micropayments. For payments less than $2-3 amounts, the existing structure is very costly. If disruption occurs it might start here. V/MA can address this and take out the risk without losing all that much of their existing revenue.

 

Vinod

 

Do you happen to have a source for the 12-13bps of fraud losses in the US? Thanks!

 

I did my research on these companies a while back and I have a ton of documents from which I pulled it all together into my writeup.

 

Sorry, I do detailed writeups but do not publish just so I do not have to worry about referencing to the actual sources.

 

Vinod

[RuleNumberOne]

The enterprise value of V and MA is equal to the enterprise value of GOOG. Vast difference between tech capability and complexity of products.