Visa Inc.

Executive Summary

Visa Inc. operates as a payments technology company worldwide. The company facilitates digital payments among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a transaction processing network that enables authorization, clearing, and settlement of payment transactions. In addition, the company offers card products, platforms, and value-added services. It provides its services under the Visa, Visa Electron, Interlink, VPAY, and PLUS brands. Since being founded in 1958 they now control 40% of the global market shares in payments processing across the globe and possess the most secure and reliable digital transaction processing infrastructure in the industry with a net worth of over $500 billion. The company operates in an essential, irreplaceable industry and their network cannot be replicated ensuring their financial security. Visa has been dominating the market for 15 years (with impressive increasing net income over these years) and has maintained a superiority over their competitors over this time period and appears to be performing extremely well as it is currently the 10th most valued company in the world. The company is listed on New York Stock Exchange, S&P 500 stock market and Dow Jones Industrial Average, at a stock price of $240 per share. Based on the Discounted Cash Flow and Multiples valuation, the Visa Inc stock is undervalued and a buy recommendation is issued.

Introduction

Visa Inc is a American multinational financial services corporation specialising in providing services to large scale financial businesses. Their main service is to provide digital transactions between merchants and consumers by providing financial institutes with Visa branded products. As Visa is a global payments technology company they are reliant only on their cloud infrastructure rather than any specific suppliers. They also cater to smaller businesses specifically with their newer products such as their small business toolkit, their analytics platform or their consulting services. The company also produces ongoing improvements to their main existing product: digital transactions, namely their “3D Secure”, the “Visa Token Service” or even their numerous analytical intelligence solutions. Founded in 1958 as part of the “BankAmericard” Credit Card Program by the Bank of America, it immediately displayed its practicality in a time where America was plagued with revolving credit accounts from several different merchants as it provided a unified financial and appeared to be the first successful “all purpose credit card”. After a few years of refining, by 1961 the BankAmericard Program had become profitable and, due to the confidentiality of its success, it had no competitors until 1966. Rebranded as “Visa” in 1976 and remained as such till the present it has become one of the world's most valuable companies, boasting a net worth of $494.97 billion as of August 2, 2023 and $505.17 billion as of August 10, 2023. As of today Visa provides digital payments across more than 200 countries and territories connecting consumers, merchants, financial institutions and businesses. In 2021, the Visa market share was 39% meaning they accounted for almost two-fifths of all credit card purchases worldwide. The runner-up UnionPay has a slightly lower share by purchase transactions than Visa’s market. In 2021, 34% of global credit card purchases were made using UnionPay. MasterCard was the third most popular card brand worldwide. This brand stood behind 24% of all credit card transactions. UnionPay also focuses almost solely on China and due to their domestic approach Visa has the ability to grow significantly on a global scale whereas their main competitor cannot.(Due to the nature of their business model of providing services to financial institutions, a common misconception is the assumption that Visa issues physical cards/credit/rates/fees although they only provide the service of monetary transactions.)

Business Model

As Visa is primarily a technological company, providing the world’s largest electronic payments network, their business model is now only heavily reliant on their cloud infrastructure to maintain their users as well as its ability to scale as they increase their payload. Visa generates income through the fees it charges financial institutions and merchants for accessing its network, as well as the fees it charges consumers who use Visa-branded cards.

Due to Visa’s immense success over the past 60 years they no longer need to focus on advertisement to promote their product as long as they continue to provide the most successful form of electronic payments network across the world. As Visa already holds the vast majority of the market share in their sector (over 50%), they no longer need to focus on expansion as their network can be scaled according to how their users grow. Considering their client-base consists of most commerce worldwide (an ever growing sector), their product appears essential for the foreseeable future.

As stated earlier, Visa’s primary strategy is to accelerate revenue growth in consumer payments, new flows and value added services, and fortify the key foundations of our business model: the core electronic payments processing network. Their network consists of 250 million lines of custom built code and operates at a 99.9999% or above availability. It facilitates payments in over 200 countries and territories and has a network covering over 2000 sites and 5800 circuits. The network is built to process up to 76 thousand transactions per second and millions in a day. To ensure safety and constant accessibility, nearly all Visa transactions worldwide are processed through the company's directly operated VisaNet at one of four secure data centres, located in Ashburn, Virginia; Highlands Ranch, Colorado; London, England; and Singapore. These facilities are heavily secured against natural disasters, crime, and terrorism; can operate independently of each other and from external utilities if necessary; and can handle up to 30,000 simultaneous transactions and up to 100 billion computations every second.

Their current products consist of 6 Visa Credit Cards, the standard Visa Debit Card, Visa Electron, Visa Cash (A Visa-branded stored-value card), Visa Contactless, mVisa and Visa Checkout; all Visa payment methods utilise their electronic network. Visa now also provides various consulting/analytics services as well as automation and tools for smaller businesses. Although Visa makes a majority of its income through services as a middleman between financial institutions and merchants, it also creates additional value through other sources. The corporation generates income through interest and investments, foreign exchange, and other streams; Visa’s net income through all of its various sources totalled $14.9b in 2022 and $12.3b in 2021. Visa’s principal clients are individual and commercial clients, financial institutions such as banks and credit unions, government entities, and merchants.

Industry Overview

As previously stated, due to the nature of its target market being substantially involved in worldwide commerce, Visa’s position as the largest global digital payment technology company in an indispensable industry both guarantees its future and its success. In this industry the total addressable market is any trade or commerce with non-cash based transactions worldwide of which Visa currently has a market share of roughly 40%. 34% of the available worldwide market is currently dominated by UnionPay International mainly due to their influence in the Chinese market. Although technically “possible”, it would be extremely unlikely and not worth the risk for Visa to invest into the Chinese transactions services market as the investment required would not lead to a guaranteed increase in market share. Alternatively, Visa chooses to strengthen its existing business model in order to claim market share from its main “real” competitor MasterCard (24% market share) as well as smaller competitors such as PayPal and American Express. Visa and Mastercard are by far the largest and cover above 80% of the global market share excluding China, however, Visa shows the highest net income in comparison to its alternative service providers and has done so for multiple years due to its effective infrastructure and electronic network. Visa’s key strengths over its major competitor MasterCard is that Visa cards offer a few more benefits such as their “Lost or Stolen Card Reporting”, insurance options, “special guest” status at luxury hotels, roadside dispatch and other perks. Visa and Mastercard are both accepted almost anywhere in the world unlike other competitors. Yet Visa is the highest valued out of all of its competitors with the highest net income (generating $14.9b in 2022.) with a return of 15.85% year-to-date (YTD) and 13.94% in the last 12 months. Over the past 10 years, Visa Inc. had an annualised return of 19.09%, outperforming the S&P 500 benchmark which had an annualised return of 10.28%.