Bulls Say
- Visa has commanding market share in a scalable industry.
- There is still plenty of runway for growth in electronic payments, which surpassed cash payments on a global basis only a few years ago.
- The scalable nature of the business should allow Visa to improve its already impressive margins.
Bears Say
- Visa’s leading market share creates more opportunities for loss than gain.
- The oligopolistic nature of the industry makes Visa and Mastercard targets for regulators; the companies have paid some large fines.
- UnionPay provides an example of how governments could favor local networks. This could shut Visa out of some emerging-market opportunities.
Morningstar Analyst Brett Horn Says
Visa (V) is an established longtime market leader that still enjoys strong growth prospects. Despite the ongoing evolution in the payment industry, we think a wide economic moat surrounds the business and Visa’s position in the global electronic payment infrastructure is essentially unassailable.
The shift toward electronic payments has driven Visa’s growth, and we expect that to continue for the foreseeable future. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting this trend still has a lot of room to run. We think emerging markets could offer a further spurt of growth even if developed markets slow. Visa’s position as the leading network makes it something of a tollbooth business, and the company is relatively agnostic to the smaller shifts within electronic payments, since it earns fees regardless of whether payment is credit, debit, or mobile.
Visa is not without its issues in the near term, and smaller peer Mastercard (MA) has been performing better over the past few years. Cross-border transactions, which are particularly lucrative for the networks, have seen dramatic declines as a result of the coronavirus outbreak and a reduction in global travel. We expect this headwind to endure for some time, but history suggests that travel ultimately makes a full recovery following disruptive events, and we expect that to be the case again, although the process could take a few years.
Visa has sensitivity to the volume of consumer transactions, and the United States remains its largest market. A downturn in the economy would slow growth. The fallout from the coronavirus has had a material impact, with both card networks seeing major declines in transaction volume, although that pressure has eased. However, we don’t see any long-term industry trends that will impede Visa’s ability to maintain its growth in the coming years. The scalability of the business should still allow the company to modestly expand its already ample margins over time.
Key Proprietary Morningstar Metrics
Fair Value Estimate: $221
Star Rating: 3 Stars
Economic Moat Rating: Wide
Moat Trend Rating: Stable
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