Visa Maintains Its Favorable Course in Fiscal Q1

Visa’s fiscal first-quarter results largely showed a continuation of recent trends. From a fundamental point of view, the outlook for Visa remains bright, as its wide moat allows it to steadily benefit from the secular trend toward electronic payments, a trend that we think has many years left to run. We will maintain our $166 fair value estimate and wide-moat rating.

On a constant-currency basis, Visa saw a 11% year-over-year increase in net revenue, a slight slowdown from recent quarters. However, we place a special focus on cross-border transactions given how lucrative they are for the networks, and here the company saw a modest pick in year-over-year volume growth to 9%. Overall, the company appears to be on track to achieve its low-double-digit net revenue growth target for fiscal 2020, a level that is roughly in line with our long-term expectations for the company.

Client incentives for the quarter came in at 22.4%, but management expects to finish the year at the high end of its projected 22.5%-23.5% range. The company has generally been besting its client incentive guidance recently, but we believe this metric will continue to track up over the long-term, as Visa shares the benefit of its scalability with its issuer clients.

On a net revenue basis, operating margins declined to 66.3% from 67.5% last year. However, management’s guidance for the full year implies margin expansion, and we believe the scalability of the business will allow for improving the company’s already impressive margins over time.

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