Visa Inc. (V) Q4 Earnings Assessment: Tracking the Financial Services Titan's Trajectory

Financial services giant Visa Inc. (V) beat revenue and earnings forecasts in its last reported quarter, propelled by a sustained resurgence in international travel post-pandemic. The results, announced following market closure on October 24, 2023, illustrate a persistent global inclination towards “Tap to Pay” transactions in in-store locations.

Despite escalating interest rates, a measure implemented by the Fed as part of its strategy to curtail inflation, American consumer spending has shown a striking tenacity. A surge in consumer expenditure prompted substantial growth in sectors like travel and retail, benefitting credit card companies like V.

The Federal Reserve Bank of New York discloses that American credit card balances have reached an unprecedented pinnacle of $1 trillion this year. In the second quarter of 2023 alone, credit card balances experienced a rise of $45 billion, marking a 4% increase year-over-year. According to Statista, around 242 billion global purchase transactions involved V payment cards during 2022, an average of nearly 0.66 billion transactions daily.

V's growth can also be attributed to the persistent shift towards digital payments, along with an extension of the company's service offerings – factors which are believed to have significantly boosted the fiscal fourth quarter performance.

For the fiscal fourth quarter (ended September 30, 2023), V’s net revenues soared 10.6% year-over-year to $8.61 billion, propelled by the burgeoning growth in payments volume, cross-border volume, and processed transactions.

With $3.20 trillion in payment volumes, V cemented its position as the unquestionable pacesetter in the payment realm. The company registered a 9% annual surge in payment volume while processed transactions touched 55.96 billion, seeing a 10% increase for both the fourth quarter and the full fiscal year. Excluding intra-European transactions, cross-border volume swelled 18% in the fourth quarter and an impressive 25% across the fiscal year.

Credit volumes reported an 8% growth, hitting $1.6 trillion during the fiscal fourth quarter, matching the debit volumes that rose by 9%. The company operates with over 8.5 billion endpoints, 3 billion cards, 3 billion accounts and 2.5 billion digital wallets in circulation.

Throughout the year, durable consumer spending patterns persisted, supplemented by the ongoing recovery of cross-border travel spending in comparison to 2019 levels, which resulted in sturdy growth across V's new flows and value-added services sectors.

V’s non-GAAP net income for the company reached $4.82 billion, and earnings per share stood at 2.33, signaling an uptick of 17.7% and 20%, respectively.

Let’s now direct our attention to other factors that may steer the course of the company's stock performance in the future:

Robust Growth

Over the past three and five years, V’s revenue grew at 11.6% and 9.7% CAGRs, respectively. Its EBITDA for the same periods grew at CAGRs of 12.1% and 10.2%, respectively. The company’s levered FCF grew at 10.3% and 9.9% CAGRs over the past three and five years, respectively.

Growing Institutional Ownership

V’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their V stock holdings.

Institutions hold roughly 95.2% of V shares. Of the 3,575 institutional holders, 1,577 have increased their positions in the stock. Moreover, 164 institutions have taken new positions (4,442,807 shares).

Optimistic Analyst Estimates

For the quarter ending December 2023, its revenue and EPS are expected to surge 10% and 9.3% year-over-year to $8.73 billion and $2.38, respectively. The company has surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Price Performance

The stock has gained over 12% year-to-date and about 23% over the past year. Moreover, V’s stock is trading above its 200-day moving average of $231.39, indicating an uptrend.

However, Wall Street analysts expect the stock to reach $279.38 in the next 12 months, indicating a potential upside of 19.1%. The price target ranges from a low of $240 to a high of $310.

Bottom Line

As a leading player in the payment processing industry, the V's services are employed every time an individual uses a V-branded credit card. This translates into millions of daily transactions – each contributing to the company's revenue.

The company has exhibited robust fiscal health and margins that make its business model highly enticing to investors. With its payment network firmly established, V can keep operational costs at bay, resulting in significant profits.

The strength and profitability of V's business elucidate its ability to increase its dividend payments consistently. Recently, V’s board of directors announced a 16% increase in its quarterly cash dividend to $0.520 per share of Class A common stock, payable to shareholders on December 1, 2023.

V pays a $1.80 per share dividend annually, which translates to a 0.78% yield on the current share price. Its four-year average dividend yield is 0.65%. The company’s dividend payouts have grown at a CAGR of 14.5% over the past three years and 16.9% over the past five years. The company boasts of a consistent record of dividend distribution for 14 consecutive years.

Moreover, in October, V’s board of directors authorized a new $25 billion multi-year class A common stock share repurchase program.

Given V’s robust profitability, optimistic analyst estimates, attractive returns to shareholders, and solid growth over the past years, it could be a wise portfolio addition now.

PayPal (PYPL) Struggles to Rebound Means Opportunity for 3 Stocks

Leading fintech company PayPal Holdings, Inc. (PYPL) has underperformed the market, with its stock declining more than 30% over the past year. Investor interest in the digital payments company has declined due to rising competition and innovative disruptions brought by its peers.

The pandemic was a good period for fintech companies like PYPL. The fintech companies commanded high valuations as investors’ interest in the sector rose with accelerated digital technology adoption. Fintech companies played a vital role in supporting businesses and consumers during the crisis.

However, the high-interest rate environment and growing competition within the fintech sector have hit PYPL’s fortunes lately. Competition from the likes of tech giant Apple Inc. (AAPL), which has entered the sector with financial services such as the savings account from Goldman Sachs, which offers a 4.15% APY, Buy Now Pay Later Service, contactless payments through Tap to Pay on iPhone, Apple Card, and Apple Pay have affected PYPL’s market share.

Earlier this year, PYPL announced that it would lay off 2,000 people, or 7% of its workforce, to reduce costs and focus its resources on core strategic priorities. Although PYPL surpassed the consensus revenue estimate in the second quarter, it failed to top analysts’ earnings estimates.

Its EPS was 0.3% below the consensus estimate, while its revenue beat analyst estimates by 0.2% in the second quarter. Its net revenues for the second quarter ended June 30, 2023, rose 7% year-over-year to $7.30 billion. Its non-GAAP EPS came in at $1.16, representing an increase of 24% year-over-year. Also, its total payment volume increased 11% year-over-year to $376.50 billion.

However, PYPL ended the second quarter with 431 million users on its platform, declining 2 million sequentially and 4 million year-over-year. This was the second consecutive quarterly decline in its users. The decline in users is alarming as it affects PYPL’s revenue and earnings. For the third quarter, PYPL forecasted its revenues to grow approximately 8% to reach $7.40 billion.

Also, its non-GAAP EPS is expected to grow between 13% and 14% to $1.22 and $1.24. For fiscal 2023, the company expects non-GAAP EPS to grow approximately 20% year-over-year to $4.95.

SVB MoffettNathanson analyst Lisa Ellis downgraded PYPL to ‘market perform.’ Ellis said, “Looking forward, unfortunately, we expect PayPal’s gross profit growth to remain lackluster, in the low-to mid-single digits. We see the potential for further downside to our estimates, particularly given the strong momentum of Apple Pay, which we worry will begin to benefit from the powerful network effects in payments.”

Alex Chriss is expected to take over as the company’s new CEO from September 27. The change in leadership comes during a challenging period for the company. Although the appointment holds promise, whether the new CEO can turn PYPL’s fortunes around has to be seen.

Although the global digital payments and financial services ecosystem remains well-positioned to register strong long-term growth, PYPL faces several headwinds. Amid PYPL’s current challenges, fundamentally stable financial services stocks Visa Inc. (V), Mastercard Incorporated (MA), and American Express Company (AXP) might benefit.

Let’s discuss these stocks in detail.

Visa Inc. (V)

V is a global payments technology company that enables digital payments between customers, merchants, financial institutions, enterprises, strategic partners, and government agencies. It also administers VisaNet, a transaction processing network that allows for the authorization, clearing, and settlement of payment transactions.

On June 28, 2023, V announced that it signed a definitive agreement to acquire Pismo, a cloud-native issuer processing and core banking platform with operations in Latin America, Asia Pacific, and Europe. V’s Chief Product and Strategy Officer Jack Forestell said, “Through the acquisition of Pismo, Visa can better serve our financial institution and fintech clients with more differentiated core banking and issuer solutions they can offer their customers.”

V’s revenue grew at a CAGR of 11.6% over the past three years. Its EBITDA grew at a CAGR of 12.1% over the past three years. In addition, its EPS grew at a CAGR of 14.4% in the same time frame.

V’s 51.94% trailing-12-month net income margin is 101.4% higher than the 25.78% industry average. Likewise, its 67.09% trailing-12-month EBIT margin is 238.7% higher than the 19.81% industry average. Furthermore, the stock’s 51.61% trailing-12-month levered FCF margin is 252.3% higher than the 14.65% industry average.

V’s net revenues for the third quarter ended June 30, 2023, increased 12% year-over-year to $8.12 billion. Its non-GAAP net income rose 7% year-over-year to $4.50 billion. The company’s operating income increased 21.1% over the prior-year quarter to $5.02 billion. Its non-GAAP EPS came in at $2.16, representing an increase of 9.1% year-over-year.

Analysts expect V’s EPS and revenue for the quarter ending September 30, 2023, to increase 16.3% and 9.9% year-over-year to $2.24 and $8.56 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters.

Mastercard Incorporated (MA)

MA is a technology company that provides transaction processing and other payment-related products and services. It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers other payment-related products and services. The company offers integrated products and value-added services for account holders, merchants, financial institutions, and businesses.

On May 26, 2023, MA and UniCredit announced the expansion of their payment partnership. The multi-year partnership will provide the necessary resources to achieve the shared ambition to increase the speed of innovation within the payments space and put customers at the center.

On April 5, 2023, MA announced that it was accelerating efforts to remove first-use PVC plastics from payment cards on its networks by 2028. This move reinforces the company’s sustainable efforts.

MA’s revenue grew at a CAGR of 13.3% over the past three years. Its levered FCF grew at a CAGR of 15.2% over the past three years. In addition, its net income grew at a CAGR of 11.8% in the same time frame.

MA’s 100% trailing-12-month gross profit margin is 67.9% higher than the 59.55% industry average. Likewise, its 57.14% trailing-12-month EBIT margin is 188.5% higher than the 19.81% industry average. Furthermore, the stock’s 0.63x trailing-12-month asset turnover ratio is 198.7% higher than the 0.21x industry average.

For the fiscal second quarter ended June 30, 2023, MA’s net revenue increased 14% year-over-year to $6.27 billion. Its non-GAAP net income rose 9.8% over the prior-year quarter to $2.74 billion. Its non-GAAP operating margin came in at 58.6%, compared to a non-GAAP operating margin of 57.9% in the year-ago quarter. Also, its non-GAAP EPS came in at $2.89, representing an increase of 12.9% year-over-year.

For the quarter ending September 30, 2023, MA’s EPS and revenue are expected to increase 20% and 13.4% year-over-year to $3.22 and $6.53 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters.

American Express Company (AXP)

AXP provides charge and credit payment card products and travel-related services. The company operates through three segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. Its products and services include payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services.

AXP’s revenue grew at a CAGR of 15.7% over the past three years. Its EPS grew at a CAGR of 26.5% over the past three years. In addition, its net income grew at a CAGR of 22.3% in the same time frame.

AXP’s 3.19% trailing-12-month Capex/Sales is 59.3% higher than the 2.01% industry average. Likewise, its 29.34% trailing-12-month Return on Common Equity is 159.7% higher than the 11.30% industry average. Furthermore, the stock’s 0.24x trailing-12-month asset turnover ratio is 12.2% higher than the 0.21x industry average.

AXP’s total revenues net of interest expense for the second quarter ended June 30, 2023, increased 12.4% year-over-year to $15.05 billion. Its net interest income rose 31.6% over the prior-year quarter to $3.11 billion. The company’s net income increased 10.7% year-over-year to $2.17 billion. Also, its EPS came in at $2.89, representing an increase of 12.5% year-over-year.

Street expects AXP’s EPS and revenue for the quarter ending September 30, 2023, to increase 19.7% and 13.6% year-over-year to $2.96 and $15.40 billion, respectively.