Visa (V-$212.52, NYSE) and Mastercard (MA-$334.49) Beat on Earnings. Management of Visa Needs to Greatly Tighten Up on Cost Controls.

Visa reported a healthy beat on quarterly earnings but guided towards a high mid-teens revenue increase in 2022. The reduction in a forecast growth rate is yawned at by retail investors as a “nothingburger” (who would fret about a company growing its revenues by 17%-18% per annum)?

Such a perfunctory dismissal of the growth deceleration misses the entire point of rampant money supply explosion and unchecked inflation. If a company whose solitary point of existence is to move money, via a monopolistic network, for a fee, yet is unable to grow its revenue beyond the rate of M2 and inflation, then a rather unsettling reality needs to be confronted; Visa is no longer growing as fast as the industry. In fact, ex-inflation and ex-money supply growth, Visa’s processing revenues are not even keeping pace.

It seems ridiculous to determine that a company with a 17% revenue increase may no longer be a growth stock, yet here we are. That’s the drawback of inflation. When inflation for a good or service has pushed up the price of that transaction by a minimum of 6%, and when M2 has grown by more than 12% this year alone on an annualized basis; for any payment processor that is not growing its revenues by a minimum of 18%, the business model is essentially stalled out.

For several years, smaller direct payment processors such as Adyen NV, among many others, have built “bypass” networks to eliminate the need for a Visa, a Mastercard, or an Amex to be involved in the transaction. I am NOT referring to the wild array of crypto operators lobbying investors for equity capital. No, I am referring to legitimate competition that lacked scale at first, but now have started to bulk up and represent legitimate, albeit smaller, competitors. Adyen NV is tracking on volume flow to exceed $1 trillion in annualized payments at some point in late 2022; that is some real processing. There are other companies also working in that direct payment space of some size. Taken as a whole, what was nothing more than a pack of tiny barking dogs, nipping at the heels of the two big dogs in the space; that pack has now started to rend some flesh from the bone.

What Visa and Mastercard have is still a monopoly, but they now are at a bit of an inflection point, because the monopoly is no longer unassailable. What sophisticated investors will be paying extremely close attention to, in the coming quarters, will be cost controls. This is where Visa is showing signs of fraying.

Last month, Visa invested in an NFT fund.

Given the point that expansion of the existing network has historically provided an EBITDA return of at least 50% per annum, who at Visa decided that the best use of hard earned capital was purchase of “memes” online? Does anyone in their right mind consider such expenditures appropriate?

it appears that without external criticism, those at Visa are of the opinion that they can do no wrong.

On the heels of a lowered growth guidance, Visa, the very next day, announced a further investment into another dilutive fintech.

When one reviews the deal flow at Visa it becomes almost numbing; a spreadsheet is required to add them up.

For some unexplainable reason, there is a growing number of executives within Visa who feel fully justified into expending as much as $1 billion US per annum (annualized basis) into the frivolity of the NFT craze, or that never think twice about throwing the proceeds of a 60% EBITDA into any and every fintech startup with a story and no actual revenues, just because they have the capital on hand.

This is THE risk of riches; that one loses control of how to allocate capital for the benefit of all shareholders.

Over time, it all adds up. $1 billion lost on a fad could represent a permanent $.40 per share dividend increase annually that is foregone. $5 billion plus in dilutive annual expenditures on a series of “magic beans” acquisitions pushed onto Visa by M&A firms and private equity shops is, to me, highly worrisome. If ANY of the many private acquisitions made over the past 36 months were winners, some should have been reflected on the top line by now. They clearly have not.

Visa, and to a lesser extent, Mastercard (who fully acknowledges that all their acquisitions have increased OPEX by more than 50% and diluted both revenue and profits), might now be at the stage where they are legitimately squandering shareholder capital. Massive EBITDA margins are not a corporate treasury chest to be frittered away; pretax earnings need to be either invested wisely to grow the core business at a faster pace than inflation + money supply growth, or, alternatively, returned to shareholders via share retirements and higher dividends.

In an inflationary environment, investors need to quite carefully consider the impact of price increases on the top line of any company that they own. Many first world institutional investors have never experienced, first hand, inflationary disclaimers on revenue and balance sheet analysis. Even CFA Institute blogs are at a loss on what to do; historical precedent is there, but the data was not well compiled in the 1970s, which was the last major inflationary cycle. In the coming quarters, I suspect a much higher number of institutional investors will ask some more pointed questions of management in quarterly conference calls about failures to grow sufficiently, beyond real rates of inflation.

Visa and Mastercard have underperformed in 2021 due to a growing suspicion by key institutional investors that both companies are dropping the ball on their core business. Both firms are highly profitable interchange networks with enormous capital and clout. They should represent investments nicely outperforming in this era of rampant money supply growth, yet they are not. The revolving door stream of VC firms extracting cash from both companies is an unwelcome diversion and robs shareholders of capital. Visa and Mastercard are NOT private equity incubators, why are they acting as such?

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