V - Visa

[Jurgis]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

 

My position is that it's too hard of a question in Visa' case. I don't think I need to name a single business to support the point that I made.  You are applying a higher standard because you disagree with me.  That's fine, you are welcome to disagree.

 

Anyway, I do have a large chunk of WFC as a 'single bank' pick and I don't think the odds of bankruptcy in 2-3 financial crises are anywhere near as high as you are suggesting.

 

I am confident that you don't know where WFC will be in 30 years: what size it will be, what profitability it will have, and even if it will exist at all.

 

However, this argument is not resolvable, so let's leave it at that.

 

Fair enough. Look it always comes back to price or it's not investing.

 

At the current price for Visa, I think you need to have greater certainty about the long-term durability of its business model than I am able to build conviction on.  It sounds like Liberty has built that conviction.  I'm not even saying that this is wrong, just that I personally can't get there.

 

Visa is a wonderful business that everyone knows about and I feel it is to some extent reflected in the price.  At a different price, I wouldn't apply such a high bar to the long-term durability.

 

It's not possible to know with certainty an exact projection of a single company, like you are posing to me as a counterfactual.  But I have a much stronger view on the long-term durability of WFC's ROE than Visa relative to its current price.

 

OK, fair enough, I mostly agree with your latest thoughts, good luck.  8)

[Liberty]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

 

How am I punting? I never claimed to be able to predict 30 years ahead with a high level of confidence.

[Liberty]

 

banks

 

The same banks that blew up and were bailed out all around the world 10 years ago? You can predict them 30 years forward with "a high degree of confidence"?

 

 

Yes, you can easily predict there will always be a bank that gathers deposits and lends money in 30 years.

 

Your point about blow ups is flawed because it assumes business model includes the derivatives / investment banking side and we had a once in 100 year crisis.

 

I don't know if the favorable features of the payments industry and Visa's business model will continue that far away.  It certainly could.

 

I can also predict there will be popsicle stands in 30 years; I thought the prediction was about what would happen to specific businesses, metrics relevant to whether they'll stay good businesses or not, not about the mere existence of the business model in general. If banks wipe out their equity again in the next 20 years, the fact that they still exist will be meagre consolation.

 

And I'm not the one who claimed the need for 30 year predictions. I can't predict 30 years ahead, I can only predict the present and work from there.

[Jurgis]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

 

How am I punting? I never claimed to be able to predict 30 years ahead with a high level of confidence.

 

Your initial answer was:

 

Fax machines and paper cheques are still around...

 

Perhaps you did not mean this as an actual prediction or answer to my question, so I withdraw my characterization.  8)

[Liberty]

Your initial answer was:

 

Fax machines and paper cheques are still around...

 

Perhaps you did not mean this as a punt, so I withdraw my characterization.  8)

 

I was adding to what you wrote, agreeing with you, I wasn't replying to your question. I see how it could be ambiguous the was I quoted both of you.

 

My meaning with that line was kind of: It's really difficult to predict how things will change. some things that you'd have thought were obviously going away are still here, and things that seemed durable are gone. But if this game was easy, everybody would do it...

[Jurgis]

Your initial answer was:

 

Fax machines and paper cheques are still around...

 

Perhaps you did not mean this as a punt, so I withdraw my characterization.  8)

 

I was adding to what you wrote, agreeing with you, I wasn't replying to your question. I see how it could be ambiguous the was I quoted both of you.

 

OK, I misunderstood what you meant.  8)

[peterHK]

Nobody knows what's going to be around in 30 years, but would I rather own a business that can for the next 10 grow earnings at a 15% CAGR and have 0 capital requirements so they return all their capital to me, or WFC that isn't growing and is capital intensive?

 

Seems like a pretty easy choice for me.

[FiveSigma]

Except you have to pay almost 3.5x more for the 15% EPS CAGR (27x) and risk of multiple compression with Visa vs. 5-10% EPS CAGR for WFC (8x) with likelihood of multiple expansion (or at least low risk of further compression).

 

Doesn't seem like an easy choice to me.

[Spekulatius]

Or GOOG which I think can do 10-14% annually and trades at <20x earnings ex cash. I think this growth rate implies that some some of the Google ventures come through. Visa is simpler because they just need to keep doing what they have been doing.

I added quite a bit too Google lately, it might be the most straightforward value proposition in tech right now. From time to time, even great businesses trade at not so great multiples. For Visa, that was the case last December.

[peterHK]

Except you have to pay almost 3.5x more for the 15% EPS CAGR (27x) and risk of multiple compression with Visa vs. 5-10% EPS CAGR for WFC (8x) with likelihood of multiple expansion (or at least low risk of further compression).

 

Doesn't seem like an easy choice to me.

 

As I believe Terry Smith said: humans are exceptionally bad at understanding the power of compounding.

[Liberty]

Except you have to pay almost 3.5x more for the 15% EPS CAGR (27x) and risk of multiple compression with Visa vs. 5-10% EPS CAGR for WFC (8x) with likelihood of multiple expansion (or at least low risk of further compression).

 

Doesn't seem like an easy choice to me.

 

People were saying the same thing 5 years ago, and what happened is that it's WFC that got multiple compression and wasn't as good a business as it seemed, and V that got multiple expansion (partly because the power of its business model became clearer in the meantime). Can't say what will happen in the future, but good businesses that stay good tend to keep fairly high multiples because the higher ROIC deserves it, to the great sadness of traditional value investors who can't see paying past 10-15x for anything even if it's the best business in the world (meanwhile Buffett is ready to pay nice multiples for things like PCP or even coke back in the day, and Ted and Todd are buying Visa and Mastercard).

[coc]

What I don’t understand about this discussion is there’s no reason you can’t buy things and watch them.

 

There is no business I can think of that cannot be screwed up to the point of extinction in the next thirty years, with bad enough management. All it takes is some CEO to make a leveraged acquisition.

 

However this doesn’t mean one cannot buy things that tend to change rather slowly and watch them carefully.

 

Let’s take the newspapers. They were certainly victims of technology change and business disruption. But did it happen overnight? I recall Buffett comments from the mid 90s where he discussed the ongoing disruption of newspapers.

 

So what’s the point of this argument? Of course no one knows exactly what Visa, or Wells Fargo for that matter, will look like in 30 years. You try to obtain a margin of safety and then you watch them year by year. In what area of business can you realistically invest money and go to sleep for 30 years?

 

The idea is to try to own things that change slowly. Beanie babies went from popular to toast within a year. Newspapers took 20 years. All the banks that failed in the 00s slowly built up risk, over several years. Berkshire sold Fannie and Freddie due to discomfort 6 years before they failed!

 

It seems like there is no way around this reality of investing. Berkshire itself could be very badly damaged by bad management, especially of the insurance division.

[merkhet]

What I don’t understand about this discussion is there’s no reason you can’t buy things and watch them.

 

There is no business I can think of that cannot be screwed up to the point of extinction in the next thirty years, with bad enough management. All it takes is some CEO to make a leveraged acquisition.

 

However this doesn’t mean one cannot buy things that tend to change rather slowly and watch them carefully.

 

Let’s take the newspapers. They were certainly victims of technology change and business disruption. But did it happen overnight? I recall Buffett comments from the mid 90s where he discussed the ongoing disruption of newspapers.

 

So what’s the point of this argument? Of course no one knows exactly what Visa, or Wells Fargo for that matter, will look like in 30 years. You try to obtain a margin of safety and then you watch them year by year. In what area of business can you realistically invest money and go to sleep for 30 years?

 

The idea is to try to own things that change slowly. Beanie babies went from popular to toast within a year. Newspapers took 20 years. All the banks that failed in the 00s slowly built up risk, over several years. Berkshire sold Fannie and Freddie due to discomfort 6 years before they failed!

 

It seems like there is no way around this reality of investing. Berkshire itself could be very badly damaged by bad management, especially of the insurance division.

 

+1

[SHDL]

What I don’t understand about this discussion is there’s no reason you can’t buy things and watch them.

 

There is no business I can think of that cannot be screwed up to the point of extinction in the next thirty years, with bad enough management. All it takes is some CEO to make a leveraged acquisition.

 

However this doesn’t mean one cannot buy things that tend to change rather slowly and watch them carefully.

 

Let’s take the newspapers. They were certainly victims of technology change and business disruption. But did it happen overnight? I recall Buffett comments from the mid 90s where he discussed the ongoing disruption of newspapers.

 

So what’s the point of this argument? Of course no one knows exactly what Visa, or Wells Fargo for that matter, will look like in 30 years. You try to obtain a margin of safety and then you watch them year by year. In what area of business can you realistically invest money and go to sleep for 30 years?

 

The idea is to try to own things that change slowly. Beanie babies went from popular to toast within a year. Newspapers took 20 years. All the banks that failed in the 00s slowly built up risk, over several years. Berkshire sold Fannie and Freddie due to discomfort 6 years before they failed!

 

It seems like there is no way around this reality of investing. Berkshire itself could be very badly damaged by bad management, especially of the insurance division.

 

Yup, this along with appropriate diversification are all you really need for (company specific) risk control. No need for every single stock in your portfolio to have near-zero downside risk.

 

And even if you are going to make a huge bet on something like V/MA and not pay attention for a few years you can always buy some puts to limit your downside.

[chrispy]

Great points and thanks for everyone's contributions.

 

With great companies at higher evaluations I find buying a 1/3 full position size is a comfortable way to start. If things stay rosy you participate in the upside and if something happens either it was not a big impairment or you have the opportunity to go all in.

[Spekulatius]

I agree with above. A 30 year time horizon is too fear of a stretch. I believe Buffet uses 10 year time horizons for a selected few businesses that he believes he understands well, based on the writings in the book “The Warren Buffet way”. I think we can all do very very well just looking ahead 5 years and reiterating as time goes by.

[Liberty]

Speaking of the B2B opportunity:

 

https://www.businesswire.com/news/home/20190611005296/en/Visa-B2B-Connect-Launches-Globally

[Liberty]

Visa CEO on B2B:

 

the B2B space is 2 segments, it's the traditional carded segment, which we think is about still $20 trillion opportunity. We're the market leader in that segment. It's 12% of our charge volume or purchase volume. It is growing over the last 3 years faster than our consumer volume has grown. It's about $1 trillion on an annualized basis of EVs. And in most countries, where we have a business in B2B, we are the market leader in that business. And we have a lot of the tools necessary, whether it's travel cards or corporate cards or procurement cards, virtual cards, which we've gotten -- we had announced the deal with Wax earlier in the year, we more recently announced deals with Sabre and Ixaris in Europe to get deeper into the virtual card business.

 

So I would look at that carded opportunity, where, as I said, we have about $1 trillion, it's a $20 trillion opportunity as a ready now opportunity. And it's really about making sure that we are getting more and more financial institutions to recognize the importance of this segment and get behind it.

 

The other segment is the kind of AR, AP integration segment, where we think it's about $80 trillion of funds flow that go -- today goes through checks and wire and ACH systems tend to be high tickets, lower volume higher ticket types of transactions. That space is tougher. It's nonhomogeneous, it can be different by segments. And it's also tricky because it's not just about the payment flow. If you're going to be successful in that space, you've got to bring other value-added and make sure that you're passing enough information, you're providing the right analytics, you've got compliance reporting, you've got usage reporting and other things that's going to be useful to the client.

 

Visa Direct:

 

Visa Direct … the capability [to] allows funds to be pushed to bank accounts. It's grown 100%. it's moving from being a concept to a pilot to a real contributing part of our business. There are number of use cases. P2P is the first one that really started it going. Visa is powering most of the big P2P systems in the United States, Zelle, Square Cash, Venmo, Apple's New P2P capability with Apple Cash, are all powered by our rail. So when you move money to me, any one of those systems, those -- that money is moving on Visa's rails and we're being paid for it.

 

Visa Europe:

 

We're past a very robust integration exercise that required position rationalization, expense rationalization, redoing a whole boatload of contracts and moving them from rebates to incentives, a huge technology migration, a lot of people changes, probably 3/4 of our management team in Europe is different. And by the way, all through that, we performed well. The business performed well. The transaction was more accretive, more quickly than we estimated and told investors that it would be. [...]

we're putting a lot more resources into countries on the continent. There's a lot of opportunity there. If you look at a country like Germany, which is less than 12% of their PCE is -- on any form digital electronic payment, it's still a heavy cash society [...] We're focused on countries like Italy and Spain, Poland. If you look at those 3 countries together, they add up to more PCE than the PCE of Germany. So there's -- and they're all in the 30s somewhere in terms of percent penetration of PCE and that's carded or electronic.

 

e-Commerce:

 

E-commerce in any given month, as I go back and look over the numbers, grows between 3 and 4x face-to-face. They just have much higher growth rate. And then for us, we pick up 2x plus the share of a -- in the e-commerce world than we do in the face-to-face well because cash isn't an option. So those 2 factors alone make it really, really attractive.

 

Contactless as a way to convert low-value transactions to cards:

 

I think that contactless is going to be a big stimulant, it's going to get used to people pulling the card out for low-value transactions. And a lot of that is 30% or 35% that have PCE in the United States that's not -- that's still on cash as these low-value items and gets people in the habit of just pulling it out on any transaction and not having to go to a reflex of taking out cash if it's less than $10.

 

Visa CFO:

 

history is littered with the carcasses of companies that don't think anything could go wrong, so we operate with a very high level of paranoia at Visa. The most important thing is to ensure that Visa is providing solutions and is relevant as the world changes.

 

Q: Can you keep growing?

A: I'll just lay out the components of what drives growth in our business and why we remain optimistic that growth rates can be high going forward. At the heart of it, our business is enabling consumer payments, and that's been the business -- that's been our core business for a long time. And that is driven essentially by 3 variables in terms of how much you can grow. Variable #1, of course, is the pace at which the global economy grows. Personal consumption expenditures generally grow in line with nominal GDP growth around the world. So in there is real growth as well as what your expectations for inflation are. That's the baseline. The exciting thing of our business has been that we've been able to grow at probably twice that rate, and sometimes more than that, driven by the fact that we are in the business of eliminating cash. Killing cash, as Al Kelly said most recently, is job 1. And the ability to digitize cash has allowed us to grow significantly faster than what nominal growth in GDP would have allowed us to. ...

 

But beyond that, what's even more exciting is in the last few years, we opened up what we call the whole set of new payment flows. And this is only just the beginning because with the advent of Visa Direct, which is a capability in -- it's more a capability than, let's say, a line of business, we can now move money both into and out of bank accounts and we can move money between any 2 nodes in our network, which is a massive expansion of capability that allows us to get into, as I said earlier, person-to-person payments, into disbursements of which there are a whole range. We can revolutionize payroll, we can revolutionize insurance payments. There's a whole range of possibilities that are only just getting going. And then there is the entire world of B2B, which again is now ripe for a whole range of solutions. So when you layer on sort of the fact that the traditional business continues to have all these growth drivers, and you put on top of that the opportunity opened up by new payment flows, it's a very exciting time in our history.

 

Contactless "revolution" and rate of adoption:

 

contactless seems like an unglamorous kind of topic. But frankly, and the reason we talk about it so much is we think it's a revolution. [...] we have never seen consumers adopt a new way of payment as fast as they have adopted contactless wherever it has been made available. We saw it in Australia. Over 90% of payments are now contactless in Australia. [...] So once the whole thing falls into place, which takes about 2 or 3 years, it goes from 0 to 90 in a year or 2. The adoption is extraordinary and the benefits are also extraordinary. [...] they start using their cards for many, many, many more transactions and essentially eliminate cash. It is almost like the final nail in the coffin of cash because at this point, cash becomes a real nuisance versus just tapping your card. And then third, merchants love it because it speeds up lines

 

Getting money from anywhere to anywhere:

 

Earthport is now connected into 88 countries. And so we now access 99% of bank accounts in the top 50 markets. [...] our goal has been to get to every bank account on a global basis and be the network of networks. So think about it as you want to get your money somewhere. Don't worry about it, just give it to us and we'll get it there. And if that means that it doesn't ride specifically on our rail the entire way, it's okay.

[coc]

“Visa is powering most of the big P2P systems in the United States, Zelle, Square Cash, Venmo, Apple's New P2P capability with Apple Cash, are all powered by our rail. So when you move money to me, any one of those systems, those -- that money is moving on Visa's rails and we're being paid for it.”

 

I’m not sure how you could more strongly describe the strength of this business even in an age of technological disruption. Everyone is still building on top of them.

[Pauly]

A great thing about V/MA is that they've had a 50 year head start on everyone else who's trying to get into payments.

It's like they were just waiting for the world to get to the point where their service could be used to its full potential.

[Jerry Capital]

Best businessss on the planet

[peterHK]

“Visa is powering most of the big P2P systems in the United States, Zelle, Square Cash, Venmo, Apple's New P2P capability with Apple Cash, are all powered by our rail. So when you move money to me, any one of those systems, those -- that money is moving on Visa's rails and we're being paid for it.”

 

I’m not sure how you could more strongly describe the strength of this business even in an age of technological disruption. Everyone is still building on top of them.

 

BuT 25x eArnInGs tHoUgh...

 

In all seriousness V/MA are the two businesses along with BAM I sleep at night the best with.

[Pauly]

“Visa is powering most of the big P2P systems in the United States, Zelle, Square Cash, Venmo, Apple's New P2P capability with Apple Cash, are all powered by our rail. So when you move money to me, any one of those systems, those -- that money is moving on Visa's rails and we're being paid for it.”

 

I’m not sure how you could more strongly describe the strength of this business even in an age of technological disruption. Everyone is still building on top of them.

 

BuT 25x eArnInGs tHoUgh...

 

In all seriousness V/MA are the two businesses along with BAM I sleep at night the best with.

 

Indeed. V has grown to be my largest position (~20% of portfolio), but I don't see a reason to sell any of it, yet.  I also hold BAM but I have to put a lot more faith in management there. Visa I think could do well with a ham sandwich in charge.

[Jerry Capital]

I think that was true of the last 5 years but what both have been doing over the last five years in preparation for the next 10 to 20 seems to be much better than a ham sandwich and I'm not sure just anyone would have prepped both companies for the coming future so well.

[Pauly]

Oh definitely. They've done very well at not getting out-flanked by the competition. But as they're a toll collector on millions of transactions a day I don't really have to worry about Al Kelly getting hit by a bus...although I certainly don't wish it on him!