Visa’s Fiscal Q3 Revenues To Witness Strong Growth Despite Slow Network Volume Gains

by Trefis Team
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Visa (NYSE: V) is expected to release its fiscal third quarter results after market close on Tuesday, July 23, and Trefis expects softness in retail sales figures for U.S. and Europe to impact the payment company’s top line. Visa’s revenues (shows key revenue components) consist of transaction processing fees, domestic assessment fees, international transaction fees, and other value-added services. All these components depend on Visa’s network volume – which in turn is largely dependent on macroeconomic factors such as GDP growth, retail sales, and consumer confidence. As U.S. and Europe are together responsible for almost 60% of Visa’s total network  volume, the figure is particularly sensitive to retails sales in these regions.

Trefis highlights the impact of changes in retail sales for key geographies on Visa’s Network Volumes in an interactive dashboard. You can also find more of our Financial Services data here.

A brief look at the previous quarter results (fiscal Q2)

  • In fiscal Q2, Visa reported total network volumes that were largely identical to the figure for the prior-year period.
  • Network Volumes from the U.S. observed a strong annual growth of 7%, but Europe and Asia-Pacific regions observed declines of 5% and 1%, respectively.
  • The geographical growth trends in Q2 were fairly in-line with Q1. However, comparing these trends with peer Mastercard, Visa’s Europe numbers observed a 5% decline as opposed to Mastercard’s 5% growth.
  • Per Trefis estimates, the data processing and services fee increased by 10% and 3.5% in the second quarter, respectively. (Note: Fees are calculated as a percentage of payments volume)
  • Despite slow growth in network volumes, Visa maintained its full-year revenue growth expectations of low double-digit level supported by increasing transaction fees.

What to expect from the third quarter results?

  • After observing a significant drop in January and February, the U.S. Retail Sales recovered in March. However, a further decline was reported for April in the Bureau’s June release. (Note: Data considered is not adjusted for seasonality).
  • A similar trend was observed in the Eurostat Retail Trade Index, where the index gained just 0.46% in April after March’s increase of 11%.
  • Retail sales growth slowed in China in April, whereas retail sales growth was stable in India.
  • Per Trefis estimates, the U.S. retail sales, ex-auto and gas, and Visa’s U.S. network volumes have a high positive correlation of +0.65. Moreover, a strong positive correlation is also observed between Visa’s network volumes from the U.S. and Europe.
  • Considering the macro-economic uncertainty associated with tariffs against China and Europe and the Fed’s June report indicating moderate growth in economic activity we expect Visa to post softer network volume growth for the third quarter.
  • However, the revenue growth is expected to be in-line with the guidance as the company reported annual net revenue growth of 13% and 8% in Q1 and Q2, respectively. This growth was supported by a 4% and 0.5% annual rise in network volumes in Q1 and Q2, respectively.

Trefis estimates Visa’s EPS for the current year to be $5.50. Taken together with a P/E of 28x, we arrive at Visa’s valuation of $154 per share, which is roughly 15% below the current market price.

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