Visa, Inc. Earnings: How Fast Can the Card Giant Grow?

On Thursday, Visa (V 0.33%) will release its quarterly report, and investors have been a bit less certain recently about the card giant's ability to keep its growth rate high enough to justify its valuation. Although rival card networks MasterCard (MA -0.07%) and American Express (AXP 0.07%) pose competitive threats, the bigger long-term question for Visa is whether it can keep up with the pace of innovation in electronic payments and sustain its leadership role in the face of nontraditional financial providers that are just now breaking into the industry.

Visa evolved as a collection of U.S. and international banking networks to facilitate credit card adoption and merchant transactions, and the success of the venture over the decades led to Visa's IPO just six years ago. In that short time, Visa shares have soared on hopes that the company could continue building on its international leadership role in the industry. But can Visa hold back both MasterCard and American Express while also keeping tech giants at bay as they try to break into the electronic payments industry on their own? Let's take an early look at what's been happening with Visa over the past quarter and what we're likely to see in its report.

Stats on Visa

Source: Yahoo! Finance.

How fast can Visa earnings grow?
Analysts have had mixed views on Visa earnings in recent months, cutting March-quarter estimates by $0.03 per share but their full-year fiscal 2015 projections by double that amount. The stock has given up ground recently, falling around 10% since mid-January.

Visa's December-quarter results showed the growth potential that the card company has, with revenue climbing 11% from the year-ago quarter and producing a 9% gain in net income. Strength in data-processing, international-transaction, and service revenue all helped add to Visa's top-line growth. Visa also did a good job of keeping costs under control, as expenses rose by just 3% and was able to divert more money toward share buybacks to keep its share price rising. Overall, total constant-currency transaction volume jumped more than 10%, indicating the extent to which customers rely on Visa worldwide.

The amazing thing about the business model that Visa has is that it's free of credit risk, leaving Visa much less of a systemic risk than other players in the banking system. American Express has shown that taking on credit risk can be extremely lucrative, but for the broader audience of customers that hold Visa cards, it's arguably safer to play the supporting role that Visa does in providing the infrastructure backbone to make payments happen. MasterCard shares that same lack of credit risk, but Visa has outpaced MasterCard on an operating margin basis and has put together a larger network than its primary rival.

But Visa still has legal troubles that it needs to resolve. Even after Visa and MasterCard resolved disputes among thousands of small retailers in a $5.7 billion settlement, Visa got sued for $5 billion last month by the world's biggest retail chain. Further lawsuits from the many big-box retailers that opted out of the initial settlement could well be forthcoming, and given the antitrust allegations involved, an adverse judgment could cost Visa billions more in damages.

The bigger threat to Visa could come from disruptive payment processing systems. Tech giants are moving forward with their own payment products, and if they succeed in cutting out Visa and its peers as middlemen, then it could crush Visa's growth prospects. Investors therefore have to remain vigilant to see even the slightest signs of erosion in Visa's industry dominance.

In the Visa earnings report, watch to see how the company deals with new competition while striving to keep its profits high. Even in a worst-case scenario, Visa's business won't evaporate overnight, but the forces are already in place that could eventually threaten Visa's future growth and leadership position in the card industry.

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