{"id":44361,"date":"2017-11-04T08:00:25","date_gmt":"2017-11-04T12:00:25","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=44361"},"modified":"2017-12-01T14:17:16","modified_gmt":"2017-12-01T19:17:16","slug":"visas-growth-slowdown-begun","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2017\/11\/visas-growth-slowdown-begun\/","title":{"rendered":"Visa's Growth Slowdown Has Begun"},"content":{"rendered":"

\"Noah<\/a><\/p>\n


<\/p>\n

Introduction<\/h2>\n

Final FY2017 numbers have been reported for Visa Inc. (NYSE:V)<\/a><\/strong> and FY2018 is now underway. I previously wrote an article proposing my thesis that growth will slow (not stop) starting with Q1 FY2018 numbers and now that FY2017 is in the books, I\u2019ll be taking a clinical approach into this thesis as we approach Q1 FY18 numbers. As expected, Visa just recently reported another great quarter for Q4 FY2017 with beats on both the top and bottom line to round out the fiscal year. EPS and revenue estimates were beaten by $0.05 and $230 million, respectively. Visa had set new to all-time highs of ~$110 per share leading into the earnings report. Despite these beats on both the top and bottom line numbers, the stock responded in a relatively muted fashion. Investors have been accustomed to year-over-year quarterly growth in the double digits over the past year, specifically post Visa Europe acquisition and integration. For year-over-year revenue comparators post-Visa Europe integration, FYQ4 2016 growth was 19% followed by FY2017 revenue growth with FYQ1 at 25%, FYQ2 was 23%, FYQ3 was 26%, and FYQ4 was 14%.<\/p>\n

FYQ4 2017 is a far departure from the previous four quarters of growth. Visa\u2019s management is now forecasting revenue growth in the high single digits with EPS growth in the mid-teens, artificially high due to share buybacks. This forward-looking revenue growth rate is a shape divergence from the past year-plus revenue growth numbers investors were enjoying yet appears to be the new normal moving forward. As I posited previously, Visa\u2019s growth rate will be slowing, now confirmed by Visa\u2019s management and is thus misaligned with the stock\u2019s 41% YTD appreciation, P\/E ratio, PEG ratio and overall growth prospects. <\/p>\n

Lather, Rinse and Repeat Until Growth Diminishes<\/h2>\n

Visa\u2019s management has been utilizing the same statement about revenue growth each of the last five quarters post-Visa Europe acquisition. However, with the most recent quarter, there\u2019s a caveat, management has now stated that growth will slow to the high single digits moving forward. <\/p>\n

Per Visa\u2019s FYQ4 2016 earnings report:<\/strong>
\n\u201cNet operating revenue in the fiscal fourth quarter 2016 was $4.3 billion, an increase of 19%, driven by the inclusion of Europe and continued growth in payments volume and processed transactions.\u201d<\/em><\/p>\n

Visa\u2019s FYQ1 2017 earnings report:<\/strong>
\n\u201cNet operating revenue in the fiscal first quarter of 2017 was $4.5 billion, an increase of 25%, driven by the inclusion of Europe and continued growth in processed transactions and nominal payments volume.\u201d <\/em><\/p>\n

Visa\u2019s FYQ2 2017 earnings report:<\/strong>
\n\u201cNet operating revenue of $4.5 billion, an increase of 23%, driven by the inclusion of Europe and continued growth in payments volume, cross-border volume, and processed transactions.\u201d <\/em><\/p>\n

Visa\u2019s FYQ3 2017 earnings report:<\/strong>
\n\u201cNet operating revenue of $4.6 billion, an increase of 26%, driven by the inclusion of Europe and continued growth in payments volume, cross-border volume, and processed transactions.\u201d <\/em><\/p>\n

Visa\u2019s FYQ4 2017 earnings report:<\/strong>
\n\u201cNet operating revenues of $4.9 billion, an increase of 14%, driven by continued growth in payments volume, cross-border volume, and processed transactions\u201d. Adding that \u201cAnnual net revenue growth of high single digits on a nominal dollar basis, with approximately 0.5 to 1 ppt of positive foreign currency impact\u201d.<\/em><\/p>\n

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The exact statement has been repeated for the past five quarters since Visa Europe was integrated into the Visa umbrella. Now management has come out and forecasted revenue growth of \u201chigh single digits,\u201d a far cry from the double-digit growth rates over the past five quarters.<\/p>\n

\"Visa
\nFigure 1 \u2013 Revenue growth starting with Visa Europe integration in FYQ4 2016 through FY2017 with Visa\u2019s management forecast for FY2018 (modeling 8.5% growth for each quarter in FY2018)<\/em><\/small><\/p>\n

The Visa Europe acquisition has been a tailwind for the company, translating into phenomenal transaction and volume growth; however, this was expected. Beginning with the initial quarter, Visa started reporting the fully integrated company; these numbers have been fantastic. Visa Inc. (NYSE:V)<\/a><\/strong> has been posting great growth across all segments of its enterprise further accentuated by the Visa Europe acquisition. Meanwhile, the company continues to grow its dividends and engage in consistent share repurchases. It\u2019s noteworthy to point out that Visa has been buying back its stock at near all-time highs as of recent. Visa has continued to be a best-in-class large-cap growth stock; however, I\u2018ll contend that the growth rate is misleading and the incorrect comparator is being used as a growth barometer. This is becoming more and more apparent with the latest 14% revenue growth and forecast of high single-digit growth rates. I feel that Visa is overvalued based on FY2018 with its true growth test in Q1 FY2018.<\/p>\n

Growth Concerns, Despite Positive Catalysts<\/h2>\n

Acquisition of Visa Europe enabled Visa to add 3,000 European issuers, over 500 million card accounts and more than \u20ac1.5 trillion in payments volumes. Visa has also managed to gain domestic market share from rivals with Costco (NASDAQ:COST<\/a>)<\/strong>, USAA and Fidelity. As part of the Costco transition, millions of co-branded American Express (NYSE:AXP)<\/a><\/strong> Costco cards were switched over to Visa. Fidelity has over 500 million cardholders that have been converted to Visa from American Express this year. USAA is the 10th largest credit and debit card issuer in the U.S. and recently converted to Visa from MasterCard (NYSE:MA)<\/a><\/strong>. Taken together, the Visa Europe acquisition and major client wins enabled a spike in growth that will likely provide a durable growth driver over the years to come. <\/p>\n

Although these are all great catalysts, my concern lied in two areas:<\/strong><\/p>\n