Visa - A toll road on the world's consumption

Visa is a technology company that acts as a middleman between banks when transactions happen via their cards.

Business Model

When you swipe a visa card, the following happens:

1. The seller's bank takes the buyer's card number, and gives it to Visa.
2. Visa contacts the buyer's bank, checks the account balance and authorizes the payment.

So, by sitting between the seller's and buyer's banks, Visa enables the transaction to take place. In exchange for this, it gets a small fees. And boy, do those small fees add up. In 2015, Visa recorded 7B of income. In 2010, the income was 3B. Per-share income rise was even higher (22% from 2010 to 2015).

Business Stats

2010 - 2015 EPS CAGR: 22%

2010 - 2015 Net Income CAGR: 16%

Net margin in 2015: 50%

CapEx / Net Income in 2015: 7%

This is an extremely capital-light business gushing out lots of cash flow. Bulk of the cash flow goes to the owners, to repurchase shares.

Outlook

Electronic payments account for only 15% of the world's total transaction volume. Cash and check are still prevalent in many parts of the world.

Visa and Mastercard have a lot of room to grow. My suspicion is that both Visa and Mastercard will grow at 10% or so CAGR for at least 10 years. The EPS may grow faster because of share repurchases.

Eventually, it may be a winner-takes-all situation, or an oligopoly. Or perhaps both will be replaced by some other form of electronic payment. I am not smart enough to figure that out.

Summary

Both Visa and Mastercard are amongst the finest businesses in the world. They are like a toll road on the consumption of the world with very low maintenance cost. I would love to own either.