Visa’s AI Innovations and What They Mean for Investors

With a global presence in over 200 countries and territories, Visa Inc. (V) is a formidable player in the Financial Services industry. Over the years, the company’s innovative payment solutions have enabled individuals to transact across various devices and payment methods anytime, anywhere.

From mobile payments to contactless transactions, Visa has consistently introduced new technologies that have transformed how we pay and do business. And now, with its latest suite of payment products and services, the credit card behemoth continues to demonstrate its capacity for innovation and growth in the digital payments arena.

Unveiling Visa’s New Products for the Digital Era

Earlier this month, at the annual Visa Payments Forum in San Francisco, the company introduced innovative products and services designed to meet the evolving needs of businesses, merchants, consumers, and financial institutions.

These offerings, set to roll out later this year, include the Visa Flexible Credential, which empowers consumers to switch between payment methods on a single card. Users have unparalleled flexibility, whether debit, credit, “pay-in-four” Buy Now Pay Later options, or rewards points. Currently living in Asia, Visa Flexible Credential is set to debut in the U.S. market later this summer in collaboration with Affirm.

The company is embracing the widespread adoption of mobile devices by introducing innovative “Tap to Everything” features, capitalizing on the versatility of NFC-enabled devices. These new features include ‘Tap to Pay,’ which transforms any device into a point-of-sale terminal; ‘Tap to Confirm’ for easy online shopping authentication; ‘Tap to Add Card’ for enhanced wallet security when adding cards to digital wallets or apps; and ‘Tap to P2P’ for seamless money transfers between family and friends.

V introduced the Visa Payment Passkey Service to combat the rising threat of online payment fraud, which takes security to the next level by replacing passwords with biometric authentication for online transactions. This feature seamlessly integrates with Click to Pay, providing a frictionless checkout experience while enhancing security. Moreover, the company is partnering with issuers worldwide to enable Click to Pay and Visa Payment Passkey Service on new Visa cards, reducing the need to enter card details and passwords manually.

In addition, the credit card provider is also digitizing and streamlining account-to-account (A2A) payments with “Pay by Bank,” offering consumers greater flexibility in how they choose to pay. Through collaborations with Global Real-Time Payments (RTP) networks, Visa is leveraging AI technology to detect and prevent fraud in A2A payments. Already making strides in Latin America and piloting the UK, Visa Protect for A2A Payments has identified 60% of previously undetected fraud and scams, ensuring a safer payment ecosystem for all.

Lastly, the company also introduced Data Tokens, a privacy-centric feature that enables consumers to control data sharing with merchants for personalized offers and revoke access through their banking apps.

Such strategic initiatives signal promising prospects for the ever-changing payments landscape, and Visa’s commitment to continuous improvement is poised to fortify its foothold.

Visa Remains at the Forefront of AI Innovation

Threat actors are increasingly employing sophisticated technologies like automated scripts and botnets to amplify card testing attacks, resulting in substantial operational costs and annual fraud losses of $1.1 billion. To counter this threat, Visa announced updates to its Visa Account Attack Intelligence (VAAI) offering on May 7, introducing the VAAI Score.

This new tool utilizes generative AI components to identify and score enumeration attacks, providing real-time risk scores for each transaction. Initially available to U.S. issuers, the VAAI Score aims to mitigate fraud and operational losses by detecting and preventing enumeration attacks in card-not-present (CNP) transactions.

On March 27, 2024, the company added three new AI-powered risk and fraud prevention solutions to its growing global value-added services business. These additions, forming part of the comprehensive Visa Protect suite, aim to combat fraud in immediate account-to-account and card-not-present (CNP) payments, enhancing security for transactions on and off Visa’s network.

Visa’s Strategic Expansion Initiatives: Boom or Bust?

Recently, Visa partnered with SKUx, a digital payment solutions provider, to enhance digital payment experiences for select merchants and consumer packaged goods companies. The collaboration aims to address client needs such as customer acquisition, loyalty programs, and consumer care.

Visa clients will gain access to SKUx’s digital payments platform, improving business-to-business and business-to-consumer payment flows. Further, this strategic move underscores V’s commitment to enhancing its services and attracting new customers, ultimately increasing revenue opportunities.

On March 26, Visa reached a landmark settlement with U.S. merchants, more than 90% of which are small businesses. The settlement reduces credit interchange rates and caps those rates into 2030. It also includes updates to several key network rules, giving merchants more choice in how they accept digital payments.

While the settlement is subject to court approval, this move aims to enhance the company’s relationships with merchants and improve the affordability of accepting Visa payments, potentially leading to increased transaction volume.

Also, in January this year, the company acquired Pismo, a global cloud-native issuer processing and core banking platform. This acquisition equips Visa to deliver enhanced core banking and card-issuer processing capabilities to clients across various product types through cloud-native APIs. By leveraging Pismo’s platform, V can extend support and connectivity for emerging payment schemes and real-time payment networks, strengthening its offerings for financial institution clients.

How Are Visa’s Fundamentals?

Despite persistent high interest rates, U.S. consumer spending has remained robust, thanks to Americans’ continued appetite for big-ticket purchases and international travel. In the second quarter that ended March 31, 2024, V’s net revenue increased 9.9% year-over-year to $8.78 billion, surpassing Wall Street’s forecast of $8.62 billion.

Consumer spending remained resilient across all segments during the quarter, driving an 8% year-over-year growth in Visa’s payments volume. Cross-border volume (excluding intra-Europe) surged by 16%, indicating strong demand for international travel. Its processed transactions rose 11% from the prior year to $55.50 billion.

Moreover, the company’s operating income grew marginally from the year-ago value to $5.35 billion. Its non-GAAP net income and non-GAAP earnings per share stood at $5.12 billion and $2.51, up 16.7% and 20.1% year-over-year, respectively.

As of March 31, 2024, Visa had $12.99 billion in cash and cash equivalents, a significant cash pile but comparatively lower than the $16.29 billion on December 31, 2023. Yet, the company was able to return $3.8 billion to shareholders in the second quarter through dividends and share repurchases.

On April 23, 2024, Visa announced a quarterly dividend of $0.52 per share of class A common stock, payable to its shareholders on June 3, 2024. V’s four-year average dividend yield is 0.67%, and its current dividend of $2.08 translates to a 0.75% yield on the current price level.

With a strong payout history, the company’s dividend has grown at CAGRs of 16.8% and 15.9% over the past three and five years, respectively. Moreover, Visa has been growing dividends for 15 consecutive years, which makes it attractive to income-oriented investors.

What’s Ahead for Visa?

Street expects Visa to generate a revenue of $8.93 billion for the third quarter (ending June 2024), indicating a 9.9% increase compared to the same period last year. The company’s earnings per share for the ongoing quarter is expected to grow 11.9% year-over-year to $2.42. Moreover, V surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is promising.

For the fiscal year ending September 2024, analysts anticipate a revenue surge of 10.1% on a year-over-year basis, reaching $35.95 billion. They forecast that earnings per share will reach $9.96, up 13.6% year-over-year. Further, Visa’s revenue and EPS for the fiscal year 2025 are expected to grow 10.4% and 12.4% year-over-year to $39.70 billion and $11.19, respectively.

Bottom Line

As consumers shrugged off worries of a slowing economy to swipe cards on everything from travel to dining out, the credit card provider has delivered solid topline growth and healthy profit margins in its latest quarterly results.

Alongside leveraging partnerships to boost its digital capabilities, Visa has remained steadfast in pursuing substantial investments to complement the same. These initiatives are anticipated to increase transaction volumes and enhance customer retention, with the company projecting low double-digit net revenue growth for fiscal 2024 on an adjusted constant-dollar basis.

Moreover, UBS anticipates a solid 11% to 12% organic net revenue growth for the year, factoring in the currency-neutral basis and the performance observed throughout the year’s first half. Reflecting this positive outlook, the firm has raised its price target on V stock to $325, up from $315, while maintaining a buy rating on the shares.

Furthermore, the stock exhibits robust profitability, as evident in its 97.81% trailing-12-month gross profit margin, which is 63.6% higher than the 59.78% industry average. V’s trailing-12-month net income and levered FCF margins of 53.86% and 46.69% are 133.7% and 166.1% higher than the industry averages of 23.05% and 17.55%, respectively. Likewise, its trailing-12-month ROTA of 19.90% compares with the 1.06% industry average.

In terms of price performance, V shares have gained more than 15% over the past nine months and nearly 6% year-to-date. To that end, it could be wise to scoop up the shares of this Dow Jones card giant to garner potential gains.

Leave a Reply

Your email address will not be published. Required fields are marked *