Visa IPO

Visa’s IPO last week was the largest ever. At $44 a share, anyone who got into the IPO got a bargain. But today, the stock retreated on what looks like a lot of profit taking on a very up day for the market. But oddly enough, so did Master Card (MA), its closest competitor. So what to make of this?

First, both Visa and Master Card derives their revenue by charging a small transaction fee to the merchant every time a cardholder makes a purchase. While they don’t actually issue the credit cards, the credit card companies act as the gatekeeper for all the electronic transactions between the merchant and the customer. So, basically put, every time you use your credit card, the credit card companies takes a small chunk, you don’t see it in the purchase price because the merchant is effectively selling his product as a small discount. While each chunk by themselves only amount to a few percent, when you have literally billions of transactions each day, it adds up to a lot of money.

Upside, Visa has a lot more room to grow in Asia, and with online shopping where just about everyone uses credit cards, Visa can derive a lot of revenue that way. Best of all, unlike banks, Visa isn’t actually loaning any money to the consumers, so there is no risk of exposure to bad loans, the banks take that risk. All of this is good news.

Downside, according to the IPO disclosure, Visa’s five largest customers account for 20% of their revenue, this could potentially become a big disaster if one of these big customers decide to stop doing business with them. There are substantial legal risks involved as well, currently, there are numerous litigations involving retailers, who are complaining about the amount of money Visa is charging the merchants. The biggest flag is that $3 Billion of the IPO proceeds is set aside for eventual settlements on these legal proceedings.

So, what does all this mean? In the short term, Visa might be in for a bumpy ride, as traders take profits from their IPO allocations. But in the long run, given the dominant market position Visa has, the only way Visa can make less money is if their biggest customers decide to stop doing business with them (unlikely given the brand power), or if the government limits the amount of fee that Visa can charge (unlikely unless the government is taken over by communists).