What Are The Implications For Fintech Disruption From Visa’s Earnings?

It’s not exactly a ringing endorsement but it was enough to send share prices higher in after-hours trading by 1.1% on Thursday and by 0.8% in regular trading on Friday.

Visa (V) earnings for the fiscal fourth quarter were better than expected.

The company reported non-GAAP earnings of $1.47 a share, four cents a share above Wall Street expectations. Earnings on a GAAP basis (Generally Accepted Accounting Principles) were $1.34 a share, 9 cents a share below forecast. Revenue for the quarter of $6.14 billion was above consensus projections of $6.08 billion and represented growth of 13% year over year.

Payments volume in the quarter grew by 9% on a constant currency basis. Cross-border volume, a strong point in the quarter, climbed 7% year over year. Processed transactions increased to 36.4 billion, a gain or 12.6% year over year.

In its guidance for 2020, the company told analysts to expect revenue growth in the low-double digits on a constant-currency basis.

Oh, and the company declared a quarterly dividend of 30 cents a share, up from the prior 25 cents a share. The dividend is payable on December 3 for shareholders of record as of November 15. The stock now pays a forward dividend of 0.68%.

So what was Wall Street so worried about that 13% revenue growth was better than expected?

In a word “disruption.” As I explained in my Fintech section of my Special Report on Disruption on my JubakAm.com subscription sitein general all those competitors from the FinTech moment that are out to grab a piece of Visa’s share of the transaction market. In specific Square (SQ), which has stolen a march on Visa and PayPal (PYPLWealth Strength IndexAAPL is Extremely Up and trending Up) in the small business market with its smart-phone and tablet-based card reader. Square has been growing its number of customers and transactions at a rate that made that company the rabbit for Visa and PayPal to chase.

Which left Visa’s and its investors hanging in an awkward place between growth and value. Was Visa still a growth stock–with the higher valuations that come with that category or had it become, if not exactly a value stock, still a stock where what counted more was steady cash flow growth and the company’s ability to raise its dividend.

For example,Visa’s increase of 5.3 billion payment transactions in the just reported fiscal fourth quarter is impressive in absolute terms. But it is only a 12.6% growth rate from the fiscal fourth quarter a year ago. For the full fiscal year net revenue growth was 13% on a constant currency basis. Very solid but perhaps a little less growth than an investor might expect for a stock that trades at 33.8 times trailing 12-month earnings per share.

From a growth perspective the forward-looking words in the company’s conference call presentation were more important that the backward looking numbers because it was those words that painted the company’s growth portrait. (Or hoped for growth portrait.) What emerged from this words for me is a company that is pressing forward to capture as much of the disruption caused by FinTech for its own benefit as possible and to prevent that disruption from slowing Visa’s growth rate.

So, for example, Visa has signed an exclusive five-year deal with the consumer debit and credit business with Chime, a challenger bank that offers its members access to a suite of intuitive banking services. And with N26, a mobile banking solution which offers goal-based saving features and early paycheck access. The company has signed up with 8 of the ten top tap-to-pay card issuers and the company expects that 300 million tap-to-pay Visa cards will have been issued by the end of calendar 2020. In what the company calls the “card not present environment” the company and its peers have launched a secure remote commerce ” (SRC) experience and click-to-pay. And  in  June, VISA launched a beta version of its  installment solution APIs  through our Visa Next platform, where issuers can offer installments to their Visa cardholders directly through participating merchants. (Something, I’d note that PayPal has offered for a while.) In the just completed quarter Affirm converted their virtual issuance to Visa, and Visa established a partnership with Afterpay to support the development of innovative installment solutions. And (and)  Visa has been making small but, in my opinion, significant technology acquisitions. In July it acquired Payworks, a company that produces a cloud-based solution for in-store payment processing. The goal is to provide a unified payment experience whether customers pay in-store, via app, or online. In June Visa bought Verifi and its dispute-resolution technology.

I’m certainly not going to claim that all these initiatives will work for Visa or that the company isn’t facing an intensely competitive playing field. But if you’re a growth investor you can at least see where Visa’s growth might be going to come from.

Visa is a member of my Jubak Picks Portfolio. The shares are up 184.96% since I added them to the portfolio on November 5, 2014.

As of today, October 28, I’m raising my target price on Visa to $194 a share from the prior $117.