The electronic payment-processing and credit card industry has been extremely lucrative for shareholders in Visa (NYSE:V) and MasterCard (NYSE:MA) in 2015, with both stocks posting solid gains and reaching unprecedented heights during the year. Yet Visa outpaced MasterCard with a 20% return in 2015, and investors are more hopeful than ever that Visa can continue to use its leadership position in the industry to open up more profit-making opportunities in the year to come. Let's take a closer look at whether 2016 could be Visa's best year yet.
Can the global economy help Visa in 2016?
One of the most surprising things about Visa's results in 2015 is how well it has done in the face of challenging conditions in the global economy. Although the U.S. market has been extremely strong, key economies in Europe, Latin America, and the Asia-Pacific region have either seen growth slow considerably or undergone recessions.
So far, those macroeconomic challenges haven't held back Visa's growth. The company saw growth in total volume throughout its global regions, with the strongest growth coming from Latin and Central America, followed closely by its Europe, Middle East, and Africa segment. Europe was the strongest market in payment volume, rising nearly 20% in local currency terms. Payment transactions jumped by more than 9 billion to 89.2 billion during fiscal 2015, and roughly half of that jump came from non-U.S. transactions.
Indeed, the only macroeconomic issue that hurt Visa in 2015 was the strong U.S. dollar, which hammered the company's dollar-denominated sales and earnings. Companywide, Visa saw total volume grow nearly 10% in constant currency terms, but that translated to gains of just 0.8% for the full year once you take the dollar into account. Few investors expect the dollar's strength to reverse itself in 2016, but Visa's ability to grow even in the face of those challenges shows just how impressive the card giant has been.
Executives have high hopes
For its part, Visa is optimistic about its future. In its most recent conference call, CFO Vassant Prabhu gave the company's outlook for 2016. Prabhu said that he expects payment volumes to rise at a faster rate than the 11% in constant currency terms that Visa has seen over the past couple of years, with gas price declines finally becoming fully incorporated in year-over-year comparisons and with the onboarding of major corporate customer Costco coming later in the year. Better conditions in Russia and Brazil should also help boost volumes.
Still, not everything will go well for Visa. Prabhu believes that cross-border growth rates aren't likely to improve from current levels in the first half of the year, as weakness in China and the strong U.S. dollar pressure cross-border activity. The CFO doesn't expect the currency pressure to let up in 2016, projecting an impact of 3 percentage points on Visa's results. Moreover, a rise in spending on client incentives could put pressure on margins.
Big international growth opportunities
Despite those challenges, Visa also has amazing opportunities for growth in 2016. The company will work to set up domestic operations within China, which is a huge win for the U.S. card network industry as a whole as the emerging-market giant opens its borders to foreign companies like Visa and MasterCard. Visa projects that it will have substantial start-up costs in establishing its presence in China, and that could weigh on short-term results. The long-run potential from a market of more than a billion people, however, should more than make up for any upfront expenses.
Meanwhile, the pending acquisition of the Visa Europe acquisition will reintegrate Visa into a fully global powerhouse. Not only will Visa get the benefit of getting back into the Western European market at a time when the local economy has been under pressure for some time and should now be poised for growth, but it will also be able to offer its multinational customers a more seamless experience that should let it compete more effectively against MasterCard and its other rivals.
Visa has done a good job of growing even in the face of the difficulties that a strong dollar has put on its business. With smart strategic planning, 2016 looks like it could be even better for Visa as the company pushes forward with growth initiatives that should help it for years to come.