Why Visa is an amazing business
And why that may not be such a good thing…
I dive into Visa (V) and explain why it is an amazing business, and what it's biggest threat is... hint: When businesses are too good, they are usually monopolies.
Full discloser: This is not financial advice, and while I am a Visa shareholder, I will tell you truth about these guys in this post. It’s not all puppies and rainbows for Visa. I may not be a shareholder forever. My goal with this post is to help you decipher what’s going on with V, I’m not telling you that you should buy it. Form your own opinion please, this is just mine. Note also that I’m a long term buy and hold type. So, unless something changes, which I will discuss in my post, I’ll probably hold Visa forever. Now… on with it.
Monopoly isn’t just a game…
If you have looked at, and analyzed, the financials of enough businesses, when you first look at Visa, it looks wrong.
It looks too fucking good. Like way too fucking good.
What business puts 55% to the bottom line after tax? Pretty much none. The list is: Visa… basically. That’s 55 cents for every dollar after Uncle Sam takes his cut. That’s insane. And if you’re wondering if there’s a catch? Yes, there absolutely is, I’ll get to that in a minute.
But first, the good stuff.
And it starts with their gross margins. Let’s take a look at the last 10 years.
V - Last 10 years Revenue, Cost of Revenue, Gross Profit, and Gross Profit Ratio.
So, as you can see, they have the gross margins of a software company. 80% is great. However, like I said, it’s pretty standard for software companies. Now Visa claims to be a “Global payments technology company”, so you might be thinking “well surely they’ll get eaten up with R&D costs and SG&A costs and come back to earth like every other tech/software company.
Yeah… No.
This is where Visa deviates from actual software companies. If you look at Salesforce (CRM), for example, at this point, you’d see a bunch of red as they are dumping tons and tons of cash into SG&A and R&D costs. Visa? Yeah fuck that, we’re just gonna bank it. Nobody’s touching us.
Each expense item shown as a percentage of gross profit.
So, there’s a lot going on here, let me explain. What you’re looking at is each expense item you’d typically see on a public company’s profit and loss, broken out and expressed as a percentage of gross profit. When a company spends less than 50% of their gross profit on expenses, I consider that good and I mark it in green. Visa? Spends less than 20% of their gross profit on operating expenses. Is that good? Uh, it’s unheard of.
Oh and remember how they said they were a tech company? Take a look at that R&D expense. Yeah that’s right, this tech company is spent a whopping $0 on R&D in the last 5 years. No innovation needed at the money printer baby!
For comparison, here is the same type of analysis for an actual software company, good old Salesforce, CRM.
Poor Salesforce, having to actually work for a living, Visa would never...
Notice something different? Yeah, they actually spent money on R&D, about 20% of their gross profit per year goes into R&D. And about 70% of their gross profit goes to selling, general, and administrative (SG&A, noted at SGA in my graphs).
So that begs the question, how does Visa stay so dominate if they don’t spend any money on R&D and don’t have to work very hard to sell their product?
Darth Visa - The Dark Side
So, how do they stay so dominate?
If you ask Visa, it’s their brand, their track record of success and their customer loyalty.
But if you ask the Department of Justice, Visa is a monopoly that exhibits “Exclusionary and anticompetitive conduct to undermine choice and innovation in payments and imposes enormous costs on consumers, merchants, and the American economy.”
If you look at the lawsuit, it doesn’t mince words. It calls Visa a monopoly. Here is one excerpt “Visa Uses Its Monopoly Power to Squash Innovative Alternatives to Its Debit Network”.
And this isn’t new. This one came at the end of a 20 year litigation battle that Visa and Mastercard ended up settling for $5.54 billion.
But wait… there’s more!
There was also a $30B settlement that Mastercard and Visa agreed to that capped processing fees until 2030…which was later rejected.
So… if it walks like a duck, and quacks like a duck…
Is it a monopoly?
Hmm, it certainly looks like one to me. But keep in mind, I’m not talking about their actions and I have no idea all the ins and outs of their operations and whether they are being anti-competitive or not.
But, the way I judge whether they are a monopoly is the numbers.
I already told you, I’ve never seen a company that’s this profitable.
So what if they are a monopoly? The DOJ still has to actually do something about it. And so far, it seems that, even to their own admission, the DOJ has not figured out a way to stop Visa being a monopoly. And Visa certainly doesn’t seem worried about it.
They’ve said as much in their earnings calls.
“We believe the lawsuit is meritless and shows a clear lack of understanding of the payment ecosystem in the United States,” McInerney told analysts on the webcast. “We will defend ourselves vigorously and are confident in our ability to demonstrate that Visa competes for every transaction in a thriving debit space that continues to grow and see new entrants.”
So, what is the conclusion?
The good: Probably the most profitable company out there, at their scale, pound for pound. 55% after tax is stupid. Because they make so much money, pretty much every financial metric you can judge them by is amazing. Such as having put $7.8B towards capital expenditures over the last 10 years and generating $150B from it.
That’s like putting $1 into a machine and getting $19.16 out of it. Do that with $7.8B and you end up with $150B.
This chart shows year, capital expenditures for that year, and earnings. Cap to earnings is % capex of earnings and C 2 E $ is if you divide the dollars from earnings over capex to see the dollars into the dollars out.
The bad: Even if the Visa CEO won’t say it, I’ll say it, Visa is probably a monopoly. If that makes you uncomfortable ethically, then don’t invest in it. If it makes you concerned that the DOJ will eventually break it up into 20 smaller payment companies or force them to spin assets out into other companies, I would understand. All of these things are reasonable worries. If it makes you worry that their profits will eventually all be eaten up by lawsuits, legal fees and settlement payments, you may be right.
The truth is it’s tough to say, which is why this isn’t financial advice. Personally, I feel like it’s unlikely Visa will face the music anytime soon. And the fact that they are as rich as they are makes me feel pretty confident that they will continue to protect their monopoly for quite a long time.
But this the reason that would get me to sell my stock in Visa. If I felt the jig was finally up for then, I would dump it. But I don’t see that on the horizon. So my current position is I’m holding my position.
I hope that made it clear what’s going on with Visa.
One thing I hoped you noticed is I didn’t say anything about the stock price. Why? Because that’s not how I invest. I focus on awesome companies and buy them when I think they are fairly priced.
Now, if you want me to comment on when to buy into Visa: if you’re interested, basically any time you see anti-competitive news come out, it spooks people and they sell, that’s usually when I buy. Other opportunities to buy it are when there is a broad sell off or people are spooked about the economy.