Visa (NYSE:V) is an iconic financial services brand, but the company wasn't spared when the COVID-19 pandemic sent the global economy spiraling. Visa makes money by charging fees to merchants when people spend money using its cards, and the company saw revenue decline sharply as people stopped spending money in March and April.

However, Visa's business is staging a strong comeback as spending has started to pick up and people use Visa cards to purchase things online.

Smiling woman holding credit card and using laptop.

Image Source: Getty Images.

A sharp drop in quarterly results

The quarantine hit Visa's business hard. Travel spending -- a particularly lucrative category -- was hit especially hard. Investors weren't surprised when Visa reported earnings for its fiscal third quarter (the period ending June 30) and revenue cratered 17%, while earnings per share (EPS) declined 22%. In a world where people are afraid to go outside, it's remarkable spending didn't fall even more.

Financial Metrics Q3 2020 Q3 2019 YOY Change %
Net revenue $4.8 billion $5.8 billion (17%)
Net income $2.4 billion $3.1 billion (24%)
Earnings per share (EPS) $1.07 $1.37 (22%)

Data Source: Visa Financial Reports. Note: Visa's Q3 spans from April 1 to June 30.

The dismal Q3 2020 earnings are in stark contrast to the company's track record of consistent double-digit revenue and earnings growth achieved over the years. In 2019, Visa saw revenue grow by 11.5%, while EPS rose by 20%.

The good news is that investors may not need to wait too long for Visa to return to growth.

Improving transaction volumes paint a rosier outlook

While Visa's Q3 financial figures were poor, the company gave investors reason to be optimistic.

The graphic below shows card transaction volumes steadily rising from early April, when they bottomed. By mid-June, overall transaction volumes returned to growth compared to the prior year. However, credit card transactions are still below where they were during the same time in 2019.

chart showing visa transactions each week from april to july

Image source: Visa Q3 earnings presentation.

The secret to Visa's success? People are still spending money; they are just spending it online or in socially distanced formats, such as having food delivered instead of eating at a restaurant. Luckily, Visa benefits from spending regardless of where it happens.

Card transactions have taken share from cash transactions because people continue to socially distance and take measures to avoid using cash. Visa has also offered good alternatives to using cash in person, such as contactless payments and payments through mobile apps, like Apple Pay.

Another positive is that Visa charges higher fees when its card is used remotely instead of at the point of sale. Therefore, Visa can actually show better revenue with fewer transactions.

An economic recovery play

The pandemic created a blip in Visa's financial performance for 2020. Although the company has taken a short-term financial hit, the future looks promising for Visa. The pandemic may have positioned Visa to take additional transaction share from cash and benefit from the rapid shift toward e-commerce.

But the company has optionality because if people start traveling and spending money in person again, Visa stands to benefit from the recovery in the in-person economy as well.

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