Visa’s Growth Slowdown Has Begun


Introduction

Final FY2017 numbers have been reported for Visa (NYSE: V) 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’ll 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 beat 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%.

FYQ4 2017 is a far departure from the previous 4 quarters of growth. Visa’s 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’s growth rate will be slowing, now confirmed by Visa’s management and is thus misaligned with the stock’s 41% YTD appreciation, P/E ratio, PEG ratio and overall growth prospects.          

 

Lather, Rinse and Repeat Until Growth Diminishes

Visa’s management has been utilizing the same statement with regard to revenue growth each of the last five quarters post Visa Europe acquisition. However, with the most recent quarter, there’s a caveat, management has now stated that growth will slow to the high single digits moving forward. 


Per Visa’s FYQ4 2016 earnings report:

Net 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.”


Visa’s FYQ1 2017 earnings report:

“Net 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.”

 

Visa’s FYQ2 2017 earnings report:

“Net operating revenue of $4.5 billion, an increase of 23%, driven by inclusion of Europe and continued growth in payments volume, cross-border volume and processed transactions.”

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Comments

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Mike Nolan 3 months ago Member's comment

Aren't you comparing #Visa prior Eu rev with Eu rev growth from 2016 vs 2017.?

Noah Kiedrowski 3 months ago Author's comment

I'm saying that the past 5 quarters of revenue growth has largely been attributed to the acquisition of Visa Europe and now that the acquisition has annualized, these growth rates are coming way down to roughly 8% moving forward. So does single digit revenue growth warrant buying a stock this richly valued?

Jesse L. Peterson 3 months ago Member's comment

Consumer credit topping just like 2008 so is the saving rate down as well like 2008.Gravity and inflation (real 6%) taking over

Barry Hochhauser 3 months ago Member's comment

Interesting read Noah Kiedrowski, but what's your take on Quad 7 Capital's opposing view on $V? www.talkmarkets.com/.../visa-is-still-a-buy Would love to see you two debate the virtues of #Visa.

Noah Kiedrowski 3 months ago Author's comment

Clearly, I disagree and they're baking in the Visa Europe numbers into the past growth and don't realize most of the growth is attributed to this acquisition. Look at my revenue graph and revenue growth graphs and you'll see. Also, zero growth over the last two consecutive quarters. Revenue was exactly the same in Q4 2017 and Q1 2018

Craig Newman 3 months ago Member's comment

Seems to me that #Visa has been doing great. I don't see any slow down ahead. Are you short $V? If so, please disclose that.

Mike Nolan 3 months ago Member's comment

Of course $V revenue is going to slow b/c of inclusion #Visa Europe has been realized. In 2008-3Q2016 growth was high single digit to low teens. 2017 was exception b/c of Europe. 2018 will be as before high single digit to low teens.

Noah Kiedrowski 3 months ago Author's comment

I wrote a follow-up article on Seeking Alpha after its most recent earnings in which Visa only grew revenue by 9% which is a far cry from the double digit revenue increases over the past year-plus. I never short equities.

Craig Newman 3 months ago Member's comment

The only way this is going to drop is if market conditions bring it down, otherwise it’s about to breakout. Bullish on $V.

Noah Kiedrowski 3 months ago Author's comment

The breakout happened months ago from $90 to $125. What will be propelling the stock higher? I like the share buybacks and increases in the divided but buying here is too risky for me considering it's single digit growth rates.

Beating Buffett 3 months ago Member's comment

Personally I think $V is on the verge of breaking out. But I'll hold off on buying more based on this article.

Noah Kiedrowski 3 months ago Author's comment

Single digit revenue growth at a lofty valuation based on any metric in my opinion. There's many companies that are growing revenues much faster with a fraction of the P/E or PEG, namely #Facebook ($FB).