Visa’s Quarter Is Solid; COVID-19 Will Disrupt Growth

Wide-moat Visa V saw only a partial effect from the COVID-19 crisis in the first quarter results, and the fact that the company reports some revenue on a one-quarter lag further complicates the situation. We think investors should key in on commentary and disclosures on more recent impacts, which suggest a very material disruption to the company’s growth in the near term, on par with what we have seen at peer Mastercard. However, in our view, nothing in the current situation impacts the favorable long-term outlook for the company. We expect to make some changes to our near-term assumptions, but we will maintain our $166 fair value estimate.

Excluding currency impacts, net revenue grew 8% year over year in the quarter, and operating margins (based on net revenue) improved to 67.0% from 66.3% last year. However, these figures reflect only a partial impact from the COVID-19 crisis in the quarter. We expect management to take some actions to rein in cost increases, but we think the fixed-cost nature of payment processing will result in margin pressure going forward while volume declines persist.

The company provided additional disclosure showing that processed transaction year-over-year growth bottomed out at about 30% in late March-early April and has since rebounded a bit to about a 20% decline. These figures show the significant impact the business is experiencing.

Further, compared with other payment processors, Visa is more exposed to this situation due to its reliance on cross-border transactions, for which it charges significantly higher fees. In recent weeks, the company has seen a roughly 40% year-over-year decline in cross-border volume, as much of cross-border activity is travel-related. However, the component that is related to online commerce has provided some ballast and has seen a significant increase. Overall, Visa appears to be performing a little bit better than peer Mastercard in cross-border transactions.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.