Visa Hit Hard by Coronavirus in Fiscal Q3

As expected, the coronavirus pandemic had a major impact on Visa’s V fiscal third-quarter results. However, the company’s disclosures on weekly trends suggest the situation is improving. We remain comfortable with our full-year projections, and will maintain our $166 fair value estimate and wide moat rating.

For the quarter, Visa saw net revenue decline 17% year over year, driven primarily by a 13% decline in processed transactions. The fixed cost nature of the business model led operating margins (on a net revenue basis) to decline to 62.0% from 66.9% last year. As a result, net income fell 23% year over year.

However, we believe most investors will focus on the weekly volume and transaction data the company has provided. These disclosures suggest ongoing improvement through July. From the trough of a roughly 30% year-over-year decline in April, overall transactions have steadily recovered to be roughly flat year over year by the start of July. U.S. payment volumes have followed a similar trajectory, returning to year-over-year growth in June, and maintaining solid single-digit growth in July. This suggests the impact should diminish significantly going forward, and that the long-term secular tailwinds that have driven Visa’s growth historically remain in place.

We believe the impact on cross-border volumes will be much more stubborn, and Visa’s disclosures support this view. Given the higher fees Visa receives for these types of transactions, they have an outsize importance on overall profitability. In this area, there is little sign of improvement. Year-over-year volumes (excluding intra-Europe transactions, which are priced similarly to domestic transactions) remained down by a little over 40% through July. Cross-border volumes are highly tied to travel, and we believe a full bounce back in travel could hinge on the development and widespread availability of a vaccine.

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