VISA FH 26 Result-- Top 10 position-strong numbers--questions over the terminal value linger

 

VISA FH26 RESULT

Good result with six-monthly numbers being, net revenue +15.8%, GAAP net income +22.5%, non GAAP +14.3%, operating income +19.7%. marking the strongest revenue growth for Visa since 2022. Revenue and net income for the six months were 50% and 53% of my full-year expectations, implying some upgrades to full-year expectations. The numbers are muddied a bit by litigation and regulatory provisions. Visa’s business is transforming from traditional credit card swipes on the rails to a broader range of activities. The revenue chart below shows that these new businesses fall within data processing, which is growing well above the traditional segments.

Visa commented that weakness due to the ME war was more than made up for in strength in other geographies; ME comprises 6% of volumes. US spending remains firm.

The result was better than management anticipated due to better demand for services, like VAS, higher volatility and flat incentives.

In Q2, Visa bought back $7.9 billion in stock, the highest quarterly buyback in Visa's history. A $20B new buyback authority was given.

Visa is increasing total net revenue and EPS guidance for the full year. For net revenue growth, we now expect low double-digit to low teens. This implies adjusted EPS growth in the low teens, also revised up from our prior outlook

The newest businesses, CMS and VAS, are defined below.

Commercial and Money Movement Solutions (CMS) business drives growth beyond traditional consumer card swipes by facilitating B2B payments, peer-to-peer (P2P) transfers, and business payouts. This division focuses on digitising the $200 trillion non-consumer flow market, encompassing corporate card programs, virtual payments, and real-time, cross-border money movement. Revenue grew 24% for the quarter in this segment.

Value-Added Services (VAS) business is a portfolio of over 200 products and services that go beyond core payment processing to help clients (issuers, acquirers, merchants) boost security, increase revenue, and improve customer experiences. It offers tools in fraud prevention, consulting, analytics, and loyalty, generating new revenue streams for Visa beyond transaction fees. VAS is 30% of revenues, growing at +25%.

VAS

We've seen more demand across the board for our fraud products. And I think that's a signal of two things. One is the environment that we're living in. When I go talk to CEOs of clients around the world, whether they're issuers, acquirers or merchants, fraud is a top 3, top 4 concern for them. And that just wasn't the case several years ago. And fraud broadly defined, whether that's cyber or more traditional payments fraud, enumeration attacks and everything in between. And it costs them on the bottom line. It ultimately creates bad user experiences, and there's a high demand for services.

And then second, they view us as their most trusted provider for these types of services. And we've been able to put products and services out in the market that are performing at much higher levels than the market has seen. One example, I think I mentioned in my prepared remarks, is our own Visa LLM that we've built based on billions of our own transactions.

The investment in these new businesses is stunting operational leverage, which has been flat over the last few years. Another takeaway is that Visa is likely in cost recovery mode rather than pushing price. Incentives appear to have settled as MA and V look to broaden their offerings; competition on incentives has stabilised. There is little doubt that Visa should be broadening its operations to include all new types of transactions and put them on its rails, even if this means that operational leverage is flat while this occurs. imo

Terminal valuation threats--Agentic AI, Stablecoins, payment nationalism

The underlying uncertainty in the Visa world is the question over the part the company will play in the new world of agentic payments and stablecoins. Visa is undertaking significant activities to play a critical role in these activities. The following are their arguments for why Visa will play a significant role.

AI and agentic commerce will expand our addressable market, and our efforts will accelerate Visa's long-term growth. Stablecoins and blockchain are significant opportunities, and we have established Visa's role as a key interoperability layer between this powerful infrastructure and real-world solutions for users.  First, like e-commerce and mobile commerce before it, agentic commerce will accelerate the digitisation of commerce worldwide. And just like the acceleration from e-commerce and mobile commerce, Visa will benefit. Agents will create significantly more transactions. Agents will intelligently split purchases across multiple transactions, optimising price, timing and value to the buyer. And importantly, in some use cases, we expect agents to pay for their own data and resource consumption transaction by transaction and event by event, which creates an entirely new category of commerce with micro transactions.

We will see accelerated digitisation of B2B payments, where there is still enormous friction that AI agents can help remove. They will be able to automate payment initiation directly from invoices and contracts and manage approvals autonomously. In this context, virtual cards and tokenisation will become a preferred way to pay and be paid. (putting much more business on the Visa rails).

Visa is extraordinarily well-positioned to win in agentic for 3 important reasons. Our network, security and trust. And a big part of our network, security and trust are Visa tokens. People overwhelmingly choose to pay with cards face-to-face and online, and they will prefer their agents to pay with cards. Now, while it's early, we are seeing growth in agentic shopping and the emergence of early agentic commerce, real transactions with Visa agentic tokens. A key to making this happen is enabling safe, simple and easy payments that are widely accepted by all API endpoints.

In all of these use cases, Visa cards are providing significant value. They're easy to use, broadly accepted, integrated into the transaction flow, offer privacy, unlike most stablecoins, offer a way to manage liquidity in aggregate rather than funding millions of real-time micro transactions, offer an issuer KYC user, security protections if something goes wrong, and in many cases, cards offer rewards and benefits. We see no other payment method on earth that delivers all of these features. Buyers know this, sellers know this and soon so will agents. We expect more transactions, more value-added services and therefore, more revenue in the years ahead from agentic.

In agentic commerce, we're going to have more transactions that are initiated from authenticated tokens, which is good. Will further reduce fraud and will further protect the ecosystem. As all of this starts to mature and evolve, we'll evolve our rules with full buy-in from the entire ecosystem.

I think the limiting factor for agentic commerce is trust. I think when we all think about ourselves as buyers, and we all think about ourselves having agents go out and transact on our behalf, we are going to fall back on payment methods that we, as users, trust. And kind of go back to the way I was describing Visa cards in my prepared remarks, they're easy to use, they're broadly accepted. They're integrated into the transaction flow. They offer privacy. They offer sellers a way to manage liquidity in aggregate rather than funding millions and millions and millions of real-time micro transactions using stablecoins or something like that. They offer billions of issuer KYC users that are ready to go with these credentials, and they offer security protections if something goes wrong.

In summary, Visa argue that using their safe, tested and efficient rails is the logical progression for agentic commerce. There are discussions between the larger agentic players and the payment providers to agree on protocols; getting these in place would be important to solidify the system.

Stablecoins

In many countries around the world, especially in emerging markets, consumers and businesses are increasingly using stablecoins as a store of value, essentially on-chain, primarily U.S. dollar-denominated accounts. In these countries, stablecoins are not generally accepted as a means of payment. We are providing on-ramps and off-ramps with stablecoin-linked Visa cards. So consumers in these countries are increasingly using stablecoin-linked Visa cards to spend their stablecoins online and at their local grocery store, petrol station and restaurants where Visa is accepted. Ultimately, we will help operate the infrastructure that can make private, regulated blockchain transactions possible. The economics of those products look just like our normal products. So by investing in building this hyperscaling bridge layer, we're providing real-world utility for buyers and sellers, and we're doing that in the context of similar economics to what we deliver today. (Visa has commented that stablecoins, unlike crypto volumes, are growing significantly for trade.)

Payment Nationalism

Traditional business is strong. And I think that's because buyers and sellers in Europe really value the Visa network, the Visa brand, the Visa trust. There's been a long-running set of initiatives in Europe, some of which have gotten more traction than others. For those that have gotten traction, there is a pretty wide base of domestic digital payment wallets in Europe that I think have had good uptake, especially in the account-to-account, but more so in the person-to-person space. And then you've got the long-running story of, I think, what was first PEPSI and then EPI and now Wero, and then you add the digital euro to that as well. We expect that there's going to be more competition in Europe, not less, just like we see around the world. We're going to continue to, kind of, deliver what we do and do the best job we can. And as a result of that, hopefully continue to win more than our fair share.

SUMMARY

Results continue to be very good for Visa. The issue, like many non-physical (intangible)  asset growth stocks, is what role they will play in the broader AI world and all that entails for growth and margins. To this end, it is early days. Visa is being very active in making its network open to as many clients and types of payment modes as possible.

There certainly are challenges, but they do not appear insurmountable at this stage. Like many of the incumbents, it is for Visa to lose rather than an inevitable decline. Questions around the terminal value are likely to persist until some more clarity is gained on where volumes will ultimately sit, on the rails or somewhere else.

So far, we have Visa acknowledging the challenge, having the resources to react and having the know-how to react. Of course, nothing is guaranteed, and it will ultimately depend on the relevance and value the network delivers.

My current assumptions at $308 give a 10% return, with 12% eps growth over the next 5 years and an exit multiple of 27X. Visa is not overly cheap; an exit multiple of 22X gives a total return of 5%, so subpar, but that looks like the downside. Under this more sombre outlook, an entry price around $255 looks attractive.