According to its Annual Report for Full Year 2020, Visa has 16B in cash, more than double the 2019 number with 7B. Why is The Card Giant piling so much cash? And Where did the money come from? Here we try to conduct a Balance Sheet Analysis of VISA.
In an economy that hit by pandemic and sealed by lockdown mantra, it is difficult to imagine that a large amount of cash come from Visa main business. Our thought then confirmed when we check its revenue and Cash From Operating (CFO) for FY 2020. There is a dip in both revenue and CFO – so this money must become from another source.
Another possibility is Visa has sold some of its business to gain that cash. Like when GE sold its BioPharma unit to Danaher in 2019, this is the case that we don’t like most. And Thanks Lord, it does not happen for VISA. We didn’t see there is a significant divestiture in its Balance Sheet, which is good.
And when we visit its Liability and Cash Flow Statement, we found the answer. Visa had raised 7B in debt – the largest since 2017 – which is confirmed both in its Long Term Debt and Cash Flow from Financing, Visa never increase its Being in a credit card business that needs only a little Capital Expenditure, why Visa has to gain some liquidity? Visa has a strong balance sheet that could handle all its short-term obligation, then…what for?
The Goliath feel the threat. Right?
Treat for Threat
The Payment platform has several challenges from Blockchain and Bitcoin, also from Cardless payment model – which is gaining popularity supported by Android and iPhone. We try to connect the dot and come to the conclusion that a serious sum of money is needed to acquire Plaid for around 5B. Simply said, Plaid connects financial apps with user bank account. So this is a network creator, a middleman.
Just like Visa.
Same Card with Master Card
Interesting to note that Visa rival (but “partner” in the duopoly industry) – Master Card – make a similar move. The New York-based company had issued a debt to fund its 3.2B acquisition of Nets – a Denmark payment platform.
Having the same “philosophy” as Plaid, the Nets’ network enables account-to-account transactions for faster, cheaper, and safer payments.
The same playbook doesn’t mean the same result. Visa’s effort to strengthen its kingdom is blocked by the Department of Justice, the acquisition of Plaid feared to bring anticompetitive practice in the respective business. So the Cash is sitting there – in Quarter Report for March 2021, we still see that ton of money, waiting its turn to be deployed. But we believe Visa lobbying power will do the job at the end of the day, we just don’t know when.
Lesson from Balance Sheet Analysis of VISA
Similar move, similar action by the duo. Note that the acquisition target isn’t payment apps or another blockchain hype. Their target is network native. The connecting platform. Something that has similarities with them. So we have to revise our premise. The Duopoly Companies doesn’t feel threatened. At least right now. Its acquisition strategy is to cement its position as a payment network. And as investors, we agree.
We don’t have to worry that Alipay or Wechat pay gains its user – Visa Master Card doesn’t see them as contenders, why we would do? Or even Apple Pay or Pay Pal. We believe that the success behind China Duo is a government back up and its culture. The mobile transaction has become a government program since ten years ago.
In the United States, The Bank is so powerful that government has no ultimate control over it – so this is the difference between Western policy and Eastern policy. Visa and other financial institutions are oligarchies in nature, thus, something that disturbs their business will get a powerful response – like the Wikileaks story in 2012.
Giant whale in the ocean doesn’t need to worry about crocodile in Yangtze river.
Even when the effort has been muted – for a while, we believe it is worth visiting Visa strategy regarding the acquisition. Visa has 6 B of Goodwill that represent only 20% of Total Assets. FYI, Goodwill is an indicator of how much a company pays acquisition more than its intrinsic value. According to our assessment, Visa has efficient acquisitions so far – and we believe, due to its track record – Visa’s attempt to obtain Plaid is an excellent move.
Balance Sheet Analysis of VISA: Could It Handle The Debt?
Another consideration of taking debt is the company’s capability to repay. We believe that Visa’s capability to generate cash from its core business could handle the debt. In the last 5 years, Visa CFO always exceed the 10 B level, thus, it is easy to handle the 7B debt. Another advantage is, Visa operates in a capital-efficient business that needs only very little CAPEX. The Visa network is like old magic, it is written with the same mantra 10 years ago. The network is so good, with less maintenance, even it doesn’t improve the algorithm regularly.
Key Takeaway from Balance Analysis of VISA
- Everything Just normal in Visa’s balance sheet, except its cash and debt.
- You have a lot of websites that cover the balance of certain companies, a ton of blogs that give you a trend or just telling you “the debt is decreasing” or “the equity is rising”. we try to be different and give you more value. As you have seen, our balance sheet analysis tells you more than that, more than the number, we also connect the balance sheet with Cash Flow analysis. We try to draw a picture that the reader could understand better, and, in turn, making better investment decisions.
- Another important point is balance sheet analysis performed to get a better picture of the company, not to make a valuation. We are very sure that the PBV approach could not be used as valuation tools for companies like Visa. We look to its balance sheet to know the company’s response against the challenge, how it funds the business strategy, do the acquisition efficient? Do the business do very well so it does not need to rely on a debt? The balance sheet gives us a summary of the company policy.