Prepared by Tara, senior analyst at BAD BEAT Investing
The market has taken a nasty turn the last week or so. One name which has been beaten down is Visa (NYSE:V). As shares look to pull into the $170 range we think you need to be buying. It is not because the problems with COVID-19 will be resolved next week, nor will the economy be healed next month, but because you want to buy quality names when there is carnage that has taken them down temporarily. The most recent earnings showed some reason to justify the pullback, but also had some positives to take note of.
Revenue falls again as expected
When it comes to a growth stock like Visa, every financial metric we watch begins with revenues. The top line fell for Visa. While the growth has stalled, we expect it to resume in 2021. While the stock can be traded effectively, we expect a continued long and slow increase in share prices. Patience will be rewarded. That said, Q4 was painful on the surface, but was mostly better than expected relative to consensus. Now, thanks to the severe impact of COVID, there has been pain. The story has always been how the volume continues to grow markedly. Now, with the slowdown, volumes were of course lower than they otherwise would have been. Volume will return again. But longer term, there is more to the Visa story. With more and more transactions globally moving away from cash and check to electronic means, Visa will continue to gain. This recent cashless push has been a slight boost as retailers are largely encouraging electronic payment.
The company delivered a mixed but mostly solid report, and revenues slowed some from COVID-19, but were essentially in line. They beat consensus expectations by $70 million, coming in at $5.1 billion.
The results strongly suggest the company is continuing to execute in certain lines, but also reflect the economic slowdown. The slowdown is temporary, but cross-border volumes were what was really slammed as people are not travelling and international commerce is reduced. The risk now is that it continues a bit longer than we would like, with threats of new shutdowns, etc.
COVID is a temporary headwind. That said, net revenue was a near 17% decrease from Q4 2019. This comes despite a 4% increase in payment dollar volume and a 3% increase in processed transactions to approximately 37.4 billion.
Merchants and consumers had been moving away from paper and cash transactions globally, and this is accelerating in the ‘new-normal.’ While there are many opinions on the merits of and drawbacks to not using/accepting cash, from an investing standpoint it is positive for Visa. It helps future growth. There is also room to expand into many more markets, especially in third world countries that stand to benefit from Visa’s technology and the services it can offer.
However, it takes us back to our point above about COVID-19 hampering the quarter. International exposure, while a strength, also led to pain thanks to the pandemic. Since COVID-19 was pretty much global in Q4 and travel was nonexistent hitting international transactions. We saw cross-border volumes decline 29%. If we back out Europe, they fell 41%. We think they will rebound in 2021.
Operational expenses fell
We still hate the growth in operational expenses, but thankfully they fell in the quarter. However, they did not fall as much as we would have liked, but the decline was a positive. Expenses have always been our biggest issue with the company. We would like to see these expenses rise a bit more slowly, boosting margins. That said, with falling revenues, increasing expenses would have been catastrophic to margins. With the 17% fall in revenues, we were hoping expenses would decline in the high single-digits this quarter. Operating expenses were down 18%, with lower advertising and marketing.
Revenue fell sharply, while expenses fell modestly. Make no mistake, higher spending is justified by strong revenue growth and investments for the future. With the present reality, we were pleased that operational expenses fell. We think that strong expense management continues into fiscal Q1.
Every year, the company has been expanding its bottom line and doing so significantly, justifying the stock’s premium valuation. The stock is never “cheap” on traditional valuation metrics. And, at least right now, growth has slowed and now contracted. We believe this is the bottom operationally. We look to the future where billions more transactions will occur every year. This is why it trades at a premium and why the market is largely ignoring the poor performance relative to history.
Net income came in at $2.45 billion. Further, earnings per share were $1.12, falling 23% from last year’s $1.45. This figure surpassed expectations for $1.10 per share in earnings, mostly on the back of the higher-than-expected revenues and lower-than-anticipated expenses. We should also point out the fact that the company also repurchased $1.6 billion worth of stock this quarter. We underestimated the impact of the repurchases as we thought these would be slowed for cash preservation.
As we move forward, the present fiscal 2021 is going to see pain as well to start, but we suspect it will improve as the year moves on and we get clarity on COVID treatments/vaccines, as well as future stimulus. If the cross-border recovery remains slow through the winter, the revenue mix shift away from cross-border will persist. However, we think you need to be buying for the future rebound in activity.
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Disclosure: I am/we are long V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.