Payment processing giant Visa (V 0.05%) recently reported its earnings, and the numbers were strong. Revenue increased 12% year-over-year despite the difficult economic climate, and adjusted earnings grew by 21%.
However, much of the company's earnings report is important to all investors, not just those who own Visa stock. Along with its quarterly results, Visa shares valuable data on payment trends, and these can give investors clues about how businesses in all sectors of the economy might be heading. With that in mind, here are some of the key highlights and what they could mean for your portfolio.
How strong is consumer and small business spending, really?
The bad news is that growth in consumer spending has certainly slowed down. According to Visa's latest data, U.S. payment volume on debit and credit cards grew by more than 20% year-over-year in February 2022, but by December, the growth rate had slowed to less than 10%. Plus, keep in mind that the inflation rate in December was 6.5% according to CPI data. So, in real terms, spending grew by a low single-digit percentage. On a constant-currency basis, payment volume in the quarter increased by 7% year-over-year on Visa's network, roughly keeping pace with inflation.
Consumer spending does seem to be rising in January on a year-over-year basis. After a steady decline in payment volume growth through much of 2022, Visa is seeing a clear turnaround in the first three weeks of January, as you can see in the chart below. However, this likely has more to do with the omicron surge that was happening last January, which slowed down spending considerably, and not a true spike in consumer activity.
Image source: Visa.
There is some good news, however. For one thing, slower growth is still growth. Even in real (inflation-adjusted) terms, consumer spending doesn't appear to be declining from year-ago levels. As Visa's CFO Vasant Prabhu said in the company's earnings call, "Our fiscal first-quarter results reflect sustained growth in domestic spending. U.S. holiday spending growth was in the high single digits on a year-over-year basis and up more than 41% versus 2019."
Furthermore, Visa is seeing a clear surge in cross-border payment volume in early January, as travel continues to recover. Cross-border payment growth is roughly 30% year-over-year, including a 75% surge in card present transactions and travel-related spending.
Image source: Visa.
What does this mean for your portfolio?
Many stocks that have underperformed during the bear market have done so on fears that consumers will cut their spending. And this has especially affected companies in the consumer discretionary space, as well as e-commerce retailers, homebuilders, and many other industries. So, if it turns out that consumer spending stays stable, it could be a positive catalyst as 2023 goes on.
It's also worth emphasizing that there are two main fears in the current uncertain economic climate. Consumer spending is only one of them. As we've discussed here, there are widespread fears that consumers (and businesses) will pump the brakes on spending, especially on discretionary purchases.
The other fears have to do with rising consumer defaults, which are not indicated in Visa's data. After all, Visa is a payment processor, not a lender. Simply put, if consumer spending remains elevated but the consumers can't pay their bills, it can still be a net negative for banks and other financial service providers and could ultimately lead to a decline in spending later on.
With that in mind, Visa's spending data is certainly encouraging and shows that consumers and businesses have been rather resilient (so far) even with uncertainty hanging over the U.S. economy. It remains to be seen whether a recession will arrive in 2023, and how bad its effects could be, but for the time being, Visa's results show there isn't an immediate cause for alarm.
