Summary

- Through the first 9 months of FY2017, Visa has only grown revenue by an aggregate of 2.33%.

- The Visa Europe acquisition has been a tailwind for the company, translating into phenomenal transaction and volume growth; however, this was expected.

- Visa has been a best in-class large-cap growth stock; however, I‘ll contend that the growth rate is misleading and the incorrect comparator is being used as a growth barometer.

- Visa has one more quarter to continue these great numbers with Q1 FY2018 revealing the true growth story.

- Q1 FY2018 will likely disappoint as this will be the first year of the fully integrated Visa Europe numbers - stock price has gotten ahead of itself, appreciating 27% YTD.

Introduction

Through the first 9 months of FY2017, Visa (NYSE: V) has only grown revenue by an aggregate of 2.33%. Q3 FY2017 revenue came in at $4.565 billion relative to $4.461 billion for Q1 FY2017. I previously wrote an article proposing my thesis that growth will slow (not stop) starting with Q1 FY2018 numbers and the latest quarterly results further support this position. As expected, Visa just recently reported another great quarter for Q3 FY2017 with beats on both the top and bottom line.

EPS and revenue estimates were beat by $0.05 and $200 million, respectively. Since its earnings release, Visa has set new to all-time highs of ~$100 per share. 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 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’s noteworthy to point out that Visa has been buying back its own stock at near all-time highs as of recent. Visa has continued to be a best in-class large-cap growth stock; however, I‘ll contend that the growth rate is misleading and the incorrect comparator is being used as a growth barometer.

Visa has been a great long-term holding that offered growth and stability independent of banks and/or interest rates; however, based on the revenue growth, I feel that the stock has gotten ahead of itself. The fully integrated Visa enterprise in conjunction with major client wins will likely enable sustained and durable growth, albeit slower, now and into the future. I feel that Visa is overvalued based on the first 9 months of revenue from FY2017 heading into Q4 FY2017 and its true growth test in Q1 FY2018.

Growing Concerns Moving Forward Despite Positive Catalysts

Acquisition of Visa Europe enabled Visa to add 3,000 European issuers, over 500 million card accounts and more than €1.5 trillion in payments volumes. Visa has also managed to gain domestic market share from rivals with Costco (NASDAQ:COST), USAA and Fidelity. As part of the Costco transition, millions of co-branded American Express (NYSE:AXP) Costco cards were switched over to Visa. Fidelity has over 500 million card holders 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). 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. Although these are all great catalysts, my concern lies in two areas:

1. When the first full year of the Visa Europe integration results are reported, we’ll have a clear year-over-year growth rate comparison accounting for the fully integrated company. I’m skeptical that this will live up to the expectations that the market is expecting.

2. Thus far, revenue growth over the first 9 months in FY2017 has been marginal, coming in at 2.33%. Unless Q4 of FY2017 is substantially higher, Q1 of 2018 will likely disappoint as this will be the first year of the fully integrated Visa Europe numbers.

FY2017 Earnings – Incorrect Pre-Visa Europe Comparator

Thus far in FY2017, all numbers have been compared to the pre-Visa Europe acquisition numbers. This is an unfair comparator as growth was expected to spike moving into FY2017. Therefore, all three FY2017 quarters have had the same comparator, a pre-Visa Europe. Visa has one more quarter to continue these amazing numbers; however, Q1 FY2018 will be the true growth story since numbers will be compared on a constant basis with Visa Europe under its umbrella.

All of Visa’s numbers have been great when compared to the quarters subsequent to the Visa Europe acquisition. I think these growth numbers are misleading and serve as an incorrect comparator. Taking a look at back-to-back quarterly comparisons from the initial quarter Visa Europe was included in the earnings results, we can see a one-time spike in revenue across the entire enterprise (Figures 1 and 2).

A huge spike in revenue growth in back-to-back quarters of 17% for the first post Visa Europe was reported. This was followed by a 4.7% increase in revenue in back-to-back quarters from the second post Visa Europe was reported. This back-to-back quarterly growth has since leveled off with marginal growth thus far in FY2017.

Figure 1 – Author’s aggregate revenue growth figure from FY2015 through FY2017 quarters with post Visa Europe in Q4 FY2016

Figure 2 - Author’s back-to-back quarterly revenue growth figure on a percentage basis from FY2015 through FY2017 quarters

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