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2021-10-11

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Visa Stock: Scalability And Buffett Value Line<blockquote>Visa股票：可扩展性和巴菲特价值线</blockquote>

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This analysis examines the most two important aspects of profit Sustainability: return on capital employed (“ROCE”) and marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the two most fundamental aspects of the same central issue of profit Sustainability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.<blockquote>本文分析Visa Inc(V)，重点关注其利润可持续性和可扩展性。该分析考察了利润可持续性最重要的两个方面：已用资本回报率(“ROCE”)和已用资本边际回报率(“MROCE”)。对我来说，ROCE和MROCE是分析企业最重要的两个指标。它们揭示了利润可持续性这一核心问题的两个最基本的方面。ROCE告诉我们该业务迄今为止的盈利能力。MROCE深入了解了盈利能力可能走向的方向。</blockquote> The results show that V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead. It is truly impressive for a business at such a staggering scale to maintain perfect scalability. Lastly, this article also discusses its valuation, especially valuation adjusted for ROCE and valuation compared to the other stocks that are exemplary scalable stocks (such as the FAAMG stocks and Buffett style stocks).<blockquote>结果表明，V不仅在过去获得了持续较高的ROCE，而且在当前阶段仍然具有完美的可扩展性，表明未来将实现可持续利润。对于规模如此惊人的企业来说，保持完美的可扩展性确实令人印象深刻。最后，本文还讨论了其估值，特别是根据ROCE调整的估值以及与其他示例性可扩展股票（例如FAAMG股票和巴菲特风格股票）相比的估值。</blockquote> The moat and the network effects<blockquote>护城河与网络效应</blockquote> V’s moat is in its scale and scalability, best demonstrated in the following two charts. The first chart shows the number of credit, debit, and prepaid cards in circulation worldwide from 2017 to 2019, with forecasts for 2023 and 2025. In 2019, there were 22.8 billion credit, debit, and prepaid cards in circulation worldwide. This figure is set to reach 29.31 billion by 2023, a 28% increase from the 2019 level. This figure will further increase to surpass 30 billion by 2025, a 34% increase from the 2019 level. In other words, the total cards in circulation will increase by more than 1/3 by 2025. The trend of digital transactions is unstoppable.<blockquote>V的护城河在于其规模和可扩展性，下面两张图表最好地展示了这一点。第一张图表显示了2017年至2019年全球流通的信用卡、借记卡和预付卡数量，并对2023年和2025年进行了预测。2019年，全球有228亿张信用卡、借记卡和预付卡在流通。到2023年，这一数字将达到293.1亿，比2019年的水平增长28%。到2025年，这一数字将进一步增加，超过300亿，比2019年的水平增长34%。也就是说，到2025年流通卡总量将增长1/3以上。数字化交易的趋势势不可挡。</blockquote> The second chart shows that V, as the leading player in this space, will benefit the most from this secular trend. V is the world’s largest retail electronic payments network providing processing services and payment product platforms. This includes credit, debit, prepaid, and commercial payments, which are offered under the Visa, Visa Electron, Interlink, and PLUS brands. Visa/PLUS is one of the largest global ATM networks. V facilitates digital payments across more than 200 countries and territories. It has 3.6 billion cards in circulation, about 16% of the total number of cards in circulation globally. It processes a mindboggling amount of transactions – 206 billion payment transactions and a total transaction volume of $12.5 trillion in 2020 – an undisputed dominance of the payment network.<blockquote>第二张图表显示，V作为该领域的领导者，将从这一长期趋势中受益最多。V是全球最大的零售电子支付网络，提供处理服务和支付产品平台。这包括信用卡、借记卡、预付费和商业支付，这些支付以Visa、Visa Electron、Interlink和PLUS品牌提供。Visa/PLUS是全球最大的ATM网络之一。V为200多个国家和地区的数字支付提供便利。它拥有36亿张流通卡，约占全球流通卡总数的16%。它处理了令人难以置信的交易量——2060亿笔支付交易，2020年总交易额为12.5万亿美元——这是支付网络无可争议的主导地位。</blockquote> <img src=\"https://static.tigerbbs.com/e261998de072e355b6f039912d0f1453\" tg-width=\"640\" tg-height=\"379\" width=\"100%\" height=\"auto\">Source: Statista<blockquote>资料来源：斯塔蒂斯塔</blockquote> <img src=\"https://static.tigerbbs.com/036bc8c94696fcfd8ed3403b699534c6\" tg-width=\"640\" tg-height=\"318\" width=\"100%\" height=\"auto\">Source: Visa USA.<blockquote>资料来源：美国签证。</blockquote> Furthermore, it is unlikely that such dominance would change in the future (barring any major regulation or antitrust legislation change) due to the so-called \"network effects\". The network effects refer to the fact that the value of certain products or services increases as more people use them. In other words, certain networks become increasingly more valuable as they become bigger. Not every network enjoys this magic feature, and as a matter of fact, most networks suffer a diminishing marginal rate of return – i.e., the additional return decreases as the network becomes bigger – as to be elaborated later. A chain restaurant network is an example. As the network becomes larger, the nodes begin to compete against each other for customers and the return diminishes.<blockquote>此外，由于所谓的“网络效应”，这种主导地位在未来不太可能改变（除非任何重大监管或反托拉斯法发生变化）。网络效应是指某些产品或服务的价值随着更多人使用而增加。换句话说，某些网络随着规模的扩大而变得越来越有价值。并不是每个网络都享有这种神奇的特性，事实上，大多数网络的边际回报率是递减的——即，额外回报随着网络变大而减少——这将在后面详细说明。连锁餐厅网络就是一个例子。随着网络变得更大，节点开始相互竞争客户，回报减少。</blockquote> But certain networks, like the services V provides, enjoy this magic trait – the network becomes more profitable as it becomes bigger. There is nothing new about the concept. It was true of railways, telephones, and fax machines. All these examples share these common traits: A) the larger the network becomes, the more valuable it becomes (one segment of a railway linking city A and B is far more valuable when this segment also links to other railways linking other cities); and B) the larger the network becomes, the higher the switching cost (if everyone uses a fax machine and you do not want to use one, good luck to you).<blockquote>但某些网络，如V提供的服务，享有这种神奇的特性——网络越大，利润就越高。这个概念没有什么新意。铁路、电话和传真机都是如此。所有这些例子都有这些共同的特征：a）网络变得越大，它就变得越有价值（当连接城市A和B的铁路的一段也连接到连接其他城市的其他铁路时，这段铁路的价值要高得多）；B）网络越大，交换成本就越高（如果每个人都使用传真机，而你不想使用传真机，祝你好运）。</blockquote> Again, there is nothing new about the concept. But the internet age dramatically amplified the potency of the network effects. Once a lead is established – for whatever the reason – the network effects would just kick in, take over, and compound itself.<blockquote>同样，这个概念没有什么新意。但是互联网时代极大地放大了网络效应的威力。一旦建立了线索——不管出于什么原因——网络效应就会开始发挥作用，接管并自我复合。</blockquote> It is a self-sustaining positive feedback loop: more users in this network will lead to more convenience, better efficiency, lower cost, which will make the network even better and more valuable for its users and clients, which will, in turn, attract more new users and clients to join and make it harder for existing users to leave, which again will lead back to more users and an even larger network. And such feedback will be reflected in a very high level of return on capital employed (“ROCE”) as to be seen later.<blockquote>这是一个自我维持的正反馈循环：这个网络中更多的用户将带来更多的便利、更好的效率、更低的成本，这将使网络对其用户和客户更好、更有价值，这反过来将吸引更多的新用户和客户加入，并使现有用户更难离开，这将再次导致更多的用户和更大的网络。这种反馈将反映在非常高的已用资本回报率（“ROCE”）中，这将在后面看到。</blockquote> Unfortunately, like all good things eventually run to an end, so do the benefits of the above network effects. At some point, gravity always catches up, and return begins to diminish. In the railway example, if enough railways have already been built to link all cities with high population density, building the next segment would suffer a diminished return now. In the fax machine example, if every office already has one, adding a second one to each office would also suffer a diminished return.<blockquote>不幸的是，就像所有美好的事情最终都会结束一样，上述网络效应的好处也会结束。在某些时候，重力总是赶上来，回报开始减少。在铁路的例子中，如果已经建造了足够多的铁路来连接所有人口密度高的城市，那么现在建造下一段铁路的回报将会减少。在传真机的例子中，如果每个办公室都已经有一台传真机，那么在每个办公室增加第二台传真机也会减少回报。</blockquote> Therefore, as investors, we do not only need to examine the ROCE, but also equally importantly, to examine the marginal return. Because the marginal return tells us if the business is still in a scalable stage, or if the business has already passed the tipping point of scalability and begins to see a diminishing return. In another word, MROCE let us see if the gravity of diminishing return has caught up yet or not.<blockquote>因此，作为投资者，我们不仅要考察ROCE，同样重要的是要考察边际收益。因为边际回报告诉我们业务是否仍处于可扩展阶段，或者业务是否已经过了可扩展性的临界点，开始出现收益递减。换句话说，MROCE让我们看看收益递减的严重性是否已经赶上了。</blockquote> And the remainder of this article will examine both aspects next.<blockquote>接下来，本文的其余部分将研究这两个方面。</blockquote> Return on capital employed (“ROCE”)<blockquote>已动用资本回报率（“ROCE”）</blockquote> ROCE stands for the return on capital employed. Note that ROCE is different from the return on equity (and more fundamental and important in my view). ROCE considers the return of capital ACTUALLY employed, and therefore provides insight into how effectively the business uses its capital to earn a profit. Readers interested in the details of the ROCE analysis can find them in my&nbsp;earlier article. Here I will just summarize the results in the chart below. In these results, I considered the following items capital actually employed A) Working capital (including payables, receivables, inventory), B) Gross Property, Plant, and Equipment, C) Research and development expenses are capitalized, and D) the intangible book value, mainly consisting of intellectual property and patents for such a business.<blockquote>ROCE代表已用资本回报率。请注意，ROCE不同于股本回报率（在我看来更基本、更重要）。ROCE考虑实际使用的资本回报，因此可以深入了解企业如何有效地利用其资本赚取利润。对ROCE分析细节感兴趣的读者可以在我之前的文章中找到。在这里，我将在下面的图表中总结结果。在这些结果中，我考虑了实际使用的以下项目资本a)营运资本（包括应付账款、应收账款、存货），B)不动产、厂房和设备总额，C)资本化的研发费用，以及D)无形账面价值，主要包括此类业务的知识产权和专利。</blockquote> As seen, it was able to maintain an astronomical level of ROCE over the past decade: on average ~103%. To put things in perspective, the next chart compares V’s ROCE against the FAAMG stocks – a group of businesses that exploits the network effects to the extreme. As can be seen, V earns a very competitive ROCE among them – only second to Apple (AAPL). Every $1 of earning reinvested will fuel more than $1 of additional future earnings growth on average.<blockquote>正如所见，它在过去十年中能够保持天文数字的ROCE水平：平均约103%。为了正确看待事情，下图将V的ROCE与FAAMG股票进行了比较，FAAMG股票是一组将网络效应发挥到极致的企业。可以看出，V在其中获得了极具竞争力的ROCE——仅次于苹果(AAPL)。平均而言，每1美元的收益再投资将推动超过1美元的未来收益增长。</blockquote> <img src=\"https://static.tigerbbs.com/877e3bb73de3e6c4fbab1a0133f74464\" tg-width=\"640\" tg-height=\"380\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha.<blockquote>资料来源：作者和Seeking Alpha。</blockquote> <img src=\"https://static.tigerbbs.com/9f25b4c6dc0c7ee738ac345c3888ae11\" tg-width=\"640\" tg-height=\"395\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha.<blockquote>资料来源：作者和Seeking Alpha。</blockquote> Introduction to marginal return on capital employed (“MROCE”)<blockquote>边际资本回报率（“边际资本回报率”）简介</blockquote> In addition to ROCE, an equally important concept is the marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the most fundamental two aspects of the same central issue of profitability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.<blockquote>除了ROCE之外，一个同样重要的概念是边际资本回报率（“MROCE”）。对我来说，ROCE和MROCE是分析企业最重要的两个指标。它们揭示了盈利能力这个核心问题的最基本的两个方面。ROCE告诉我们该业务迄今为止的盈利能力。MROCE深入了解了盈利能力可能走向的方向。</blockquote> A bit of background and introduction for readers who are new to the concept. For readers familiar with the concept already, definitely skip this section. From what I’ve learned, the legendary economist John Maynard Keynes first explicitly expressed this concept, although people before him have observed and thought about it for some time already. What the concept tries to capture is a basic law in economic activities: the law of diminishing returns. Warren Buffett likes to say that interest rate acts like gravity on all economic activities. Well, diminishing returns act like gravity on all economic activities too, if not more so, as long as human nature does not change in any fundamental way.<blockquote>为不熟悉这个概念的读者提供一点背景和介绍。对于已经熟悉这个概念的读者来说，一定要跳过这一部分。据我所知，传奇经济学家约翰·梅纳德·凯恩斯首先明确表达了这个概念，尽管在他之前的人已经观察和思考了一段时间。这个概念试图捕捉的是经济活动中的一个基本规律：收益递减规律。沃伦·巴菲特喜欢说，利率就像重力一样影响所有经济活动。嗯，只要人性不发生任何根本性的变化，收益递减对所有经济活动也有引力作用，如果不是更大的话。</blockquote> The next chart illustrates the concept. As long as shareholders are seeking profit, a public business will first invest its money at projects with the highest possible rate of return (i.e., picking the lowest hanging apples first or getting the most bang for the buck first). Therefore, the first batch of available resources is invested at a high rate of return – the highest the business can possibly identify. The second batch of money will have to be invested at a somewhat lower rate of return since the best ideas have been taken by the first batch of resources already, and so on. The last batch of money invested may earn a rate of return that is only above the cost of capital. And finally, the end result is a declining MROCE curve as shown.<blockquote>下一个图表说明了这个概念。只要股东寻求利润，上市企业就会首先将资金投资于回报率最高的项目（即，先摘最低的苹果或先获得最大的回报）。因此，第一批可用资源的投资回报率很高——企业可能确定的最高回报率。第二批资金将不得不以较低的回报率进行投资，因为最好的想法已经被第一批资源采纳了，等等。最后一批投入的钱可能会获得仅高于资金成本的回报率。最后，最终结果是如图所示下降的MROCE曲线。</blockquote> <img src=\"https://static.tigerbbs.com/f1cd59ec1a6da411c303c2bbccaf2425\" tg-width=\"640\" tg-height=\"460\" width=\"100%\" height=\"auto\">Source: author<blockquote>来源：作者</blockquote> The ROCE we normally talk about and companies report refers to the average of this curve – averaging the return on all batches of money invested. Obviously, the average is very useful information by itself. It tells us how efficiently the business has been converting resources into profit so far – but its limitation is that it only tells us the efficiency of the resources that have already been invested SO FAR. What is of equal importance to investors is the MROCE, which tells us how much incremental profit the business WILL generate when the next batch of resources are invested.<blockquote>我们通常谈论和公司报告的ROCE指的是这条曲线的平均值——平均所有批次投资的回报。显然，平均值本身就是非常有用的信息。它告诉我们企业到目前为止将资源转化为利润的效率——但它的局限性在于，它只告诉我们到目前为止已经投入的资源的效率。对投资者同样重要的是MROCE，它告诉我们下一批资源投入时，业务会产生多少增量利润。</blockquote> For investors, a dream business to invest in would be a business that enjoys a flat MROCE curve as shown by the solid blue line. This would be a business that is perfectly scalable. A business that earns a consistent and stable profit for every batch of resources invested. However, such a business is really only a dream business. I mentioned earlier that diminishing returns act like gravity on all economic activities - because they really do. There has been no business (at least not so far in human history) that can keep growing while at the same time maintaining a constant return on capital. At some point, gravity always catches up and the return begins to decline (as shown by the dashed blue line).<blockquote>对于投资者来说，梦想投资的企业是拥有平坦MROCE曲线的企业，如蓝色实线所示。这将是一个完全可扩展的业务。每投入一批资源都能获得持续稳定利润的企业。然而，这样的生意真的只是梦中生意。我之前提到过，收益递减对所有经济活动都有引力作用——因为它们确实如此。从来没有一个企业（至少在人类历史上没有）能够在保持资本回报率的同时保持增长。在某些时候，重力总是赶上来，回报开始下降（如蓝色虚线所示）。</blockquote> V’s MROCE<blockquote>V的MROCE</blockquote> So for investors, the next best deal is to invest in a business that A) has a high and stable ROCE, and B) that is still in the scalable stage (the gravity of diminishing return has not caught up yet). And as shown in the next chart, V seems to be such a business at such a stage.<blockquote>因此，对于投资者来说，下一个最好的交易是投资a）具有高且稳定的ROCE，B）仍处于可扩展阶段（回报递减的严重性尚未赶上）的企业。而如下图所示，V在这样一个阶段似乎就是这样一个业务。</blockquote> This chart shows the MROCE and ROCE for V over recent years. The ROCE data are the same as those shown in the previous section. The MROCE data are estimated by the following steps. First, the capital employed was calculated for each year. Second, the earnings were calculated each year. Third, then the incremental of capital employed year over year was calculated. Similarly, the incremental earnings year over year were also calculated. And finally, the ratio between the incremental earnings and incremental capital employed was calculated to approximate the MROCE. During years when there were large fluctuations in either the incremental earnings or the capital employed, a multi-year running average was taken to smooth the fluctuations.<blockquote>这张图表显示了近年来V的MROCE和ROCE。ROCE数据与上一节所示相同。通过以下步骤估计MROCE数据。首先，计算每年使用的资本。其次，每年计算收益。第三，计算每年使用的资本增量。同样，还计算了同比增量收益。最后，计算增量收益和增量资本使用之间的比率以近似MROCE。在增量盈利或资本使用波动较大的年度，采用多年运行平均法来平滑波动。</blockquote> Before we began to interpret the results, let me first clarify the difficulties of analyzing marginal return on capital and the limitations of the approach I used here. Firstly, it is just mathematically much harder to estimate the rate of change (e.g., which is what MROCE is essentially is) than the average change (which is what ROCE is essentially is). Estimating the latter involves dividing two large numbers and the uncertainties are small. Estimating the former requires dividing two small numbers and the uncertainties in the financial data can be magnified. Secondly, some capital investments in a business can take multiple years (more than 3 years) to bear fruit (or to fail). Therefore, isolating and tracking the marginal return produced by investments made in a given year is inherently difficult. Although most of the projects should begin to show results (either good or bad) in 3 years and this approach should be able to capture the dominating trend of marginal return.<blockquote>在我们开始解释结果之前，让我首先澄清分析边际资本回报率的困难以及我在这里使用的方法的局限性。首先，从数学上讲，估计变化率（例如，MROCE本质上是什么）比平均变化（ROCE本质上是什么）要困难得多。估计后者需要除以两个大数，不确定性很小。估计前者需要除以两个小数字，财务数据中的不确定性可以被放大。其次，对企业的一些资本投资可能需要多年（超过3年）才能取得成果（或失败）。因此，隔离和跟踪某一年投资产生的边际回报本质上是困难的。尽管大多数项目应该在3年内开始显示结果（无论是好的还是坏的），并且这种方法应该能够捕捉边际回报的主导趋势。</blockquote> With the above understanding, let’s look at the results closely. First, note that the extraordinarily high MROCE during the early part of the decade again provides a strong illustration of the network effects and the secular trend that support the business at a fundamental level. The business model is just too good.<blockquote>有了以上的了解，我们来仔细看看结果。首先，请注意，本世纪初极高的MROCE再次有力地说明了从根本上支持业务的网络效应和长期趋势。商业模式太好了。</blockquote> The results in the chart also show that at this stage, V has been actually able to maintain an MROCE that actually is higher than the average ROCE in recent years. As seen, the ROCE has been on average 103% in recent years, and the MROCE has been on average 157%. It was significantly lower than the 350+% level in the earlier part of the decade – gravity always tries to catch up. But it is still higher than the ROCE by a good margin. And the gap is more than 50%, too large to be caused by the uncertainties in the financial data and rounding off errors. So this result suggests that V has not entered a stage of diminishing return yet - gravity has not caught up yet. And if the current MROCE continues, V’s ROCE will maintain its current high level or even further expand.<blockquote>图表中的结果还显示，在这个阶段，V实际上能够保持实际上高于近年来平均ROCE的MROCE。可以看出，近年来ROCE平均为103%，MROCE平均为157%。这明显低于本世纪初350%以上的水平——重力总是试图迎头赶上。但仍远高于ROCE。而且差距超过50%，太大了，不可能是财务数据的不确定性和舍入误差造成的。所以这个结果表明V还没有进入收益递减阶段——重力还没有赶上。而如果目前的MROCE继续下去，V的ROCE将维持目前的高水平，甚至进一步扩大。</blockquote> <img src=\"https://static.tigerbbs.com/4cea9c214b6d0dd15d8f9c5c1392272e\" tg-width=\"640\" tg-height=\"398\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha data.<blockquote>资料来源：作者和Seeking Alpha数据。</blockquote> Valuation<blockquote>估值</blockquote> After the above discussion of its profitability sustainability, let’s look at the valuation. At its current price levels, V’s PE is about 44x and FW PE is about 39.6x. The valuation is both high in absolute terms and also high in relative terms. For example, when compared to the FAAMG pack, V’s current valuation is only lower than Amazon (AMZN) in terms of the PE multiple and higher than all the others.<blockquote>以上讨论完其盈利持续性，我们再来看看估值。在目前的价格水平上，V的PE约为44倍，FW PE约为39.6倍。估值无论是绝对值还是相对值都很高。例如，与FAAMG pack相比，V目前的估值仅低于亚马逊(AMZN)的市盈率，高于所有其他公司。</blockquote> It is not that meaningful to discuss valuation in isolation and without adjusting for the quality of the business. The next chart therefore also compares V valuation adjusted for its ROCE with its peers. If you are familiar with Buffett’s holdings, you would recognize that the stocks in this chart represent some of the large BRK holdings.<blockquote>如果不根据业务质量进行调整，孤立地讨论估值是没有意义的。因此，下一张图表还将根据ROCE调整后的V估值与同行进行了比较。如果您熟悉巴菲特的持股，您就会认识到这张图表中的股票代表了BRK的一些大型持股。</blockquote> I am not sure what the picture will look like as we add more data points on this chart (I do plan to organize my notes on other BRK major holdings and add more data points onto this plot). But with the few data points I have now, I cannot help drawing/seeing the green line - what I call a Buffett value line. It is a line linking AbbVie Inc (ABBV) and AAPL - a good business at a good price and a high-quality business at a high price. So from a value investor point of view, it only makes sense to make investments along this line or below it. Because investment along this line or below represents a trade-off between quality and price that is equivalent or better than ABBV or AAPL. It makes no sense to invest above this line, as anything above this line represents an inferior trade-off between quality and price - we'd be better off just investing in ABBV and AAPL.<blockquote>我不确定当我们在这张图表上添加更多数据点时，情况会是什么样子（我确实计划组织我对其他BRK主要持股的笔记，并在这张图表上添加更多数据点）。但凭借我现在掌握的几个数据点，我忍不住画出/看到了绿线——我看涨期权的巴菲特价值线。它是连接艾伯维公司（ABBV）和苹果公司的一条线——物美价廉的好企业和高价的高质量企业。因此，从价值投资者的角度来看，只有沿着这条线或低于这条线进行投资才有意义。因为沿着这条线或以下的投资代表了质量和价格之间的权衡，相当于或优于ABBV或AAPL。投资高于这条线是没有意义的，因为高于这条线的任何东西都代表着质量和价格之间的劣质权衡——我们最好只投资ABBV和AAPL。</blockquote> As you can see, V is currently way above the green line, showing a valuation that is only expensive by itself, but also when adjusted for its ROCE – even if it is superb ROCE.<blockquote>正如您所看到的，V目前远高于绿线，表明其估值不仅本身昂贵，而且在根据其ROCE进行调整后也很昂贵——即使它的ROCE非常出色。</blockquote> <img src=\"https://static.tigerbbs.com/6e9fbfdb9a53f0dac2386fcfaf067800\" tg-width=\"640\" tg-height=\"427\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha data.<blockquote>资料来源：作者和Seeking Alpha数据。</blockquote> Catalysts and risks<blockquote>催化剂和风险</blockquote> The long-term catalyst is the trend of digital transactions as mentioned at the beginning of the article. In my view, this trend is unstoppable. The expansive deployment of e-commerce platforms will further accelerate this transition.<blockquote>长期催化剂是文章开头提到的数字化交易趋势。在我看来，这个趋势是不可阻挡的。电子商务平台的广泛部署将进一步加速这一转变。</blockquote> The most significant catalyst and also a risk at the same time in the near term is the direction and the pace of the economic recovery. If economic activities and especially travel activities resume to their normal level, V will benefit significantly, as commented by the CFO:<blockquote>短期内最重要的催化剂，同时也是风险，是经济复苏的方向和步伐。正如首席财务官所评论的，如果经济活动，尤其是旅游活动恢复到正常水平，V将受益匪浅：</blockquote> \"We have seen immediate impacts since popular travel destinations opened their borders. Greece opened borders in April, and inbound card-present spend rose nearly 30 points by the end of June relative to 2019 levels. France opened on June 9, and inbound card-present volumes rose nearly 20 points by the end of June relative to 2019 ... Since April, card-present cross-border spend in Mexico from the U.S. rose nearly 50 points to over 170% of 2019 levels.\" Vasant Prabhu, Visa CFO (Q3 FY21 earnings call) In terms of risks, I see a valuation risk here as aforementioned. In terms of business fundamentals, I really do not see any risks in the near- or even long-term. The economic recovery from the pandemic mentioned above is not really a fundamental risk in my view. Even if it develops in the wrong direction and/or at a pace slower than expected, it is at most a temporary hiccup for V. The business model is too robust and too scalable. In the really long term, we can only speculate. The disruption from Fintechs and Crypto currency must be a potential risk in the long term. I suggest readers interested in these discussions to read the analysis published by&nbsp;Natalie Koo.<blockquote>“自从热门旅游目的地开放边境以来，我们已经看到了直接的影响。希腊在4月份开放了边境，到6月底，入境持卡消费相对于2019年的水平增长了近30个百分点。法国于6月9日开放，截至6月底，入境持卡量相对于2019年增长了近20个百分点...自4月份以来，从美国到墨西哥的持卡跨境消费增长了近50个百分点，达到2019年水平的170%以上。”Vasant Prabhu，Visa首席财务官（2021财年第三季度看涨期权收益）就风险而言，我看到了前面提到的估值风险。就业务基本面而言，我确实认为短期甚至长期没有任何风险。在我看来，上述疫情的经济复苏并不是真正的根本性风险。即使它朝着错误的方向发展和/或以比预期更慢的速度发展，对V来说也最多是暂时的打嗝。商业模式太健壮，可扩展性太强。从真正的长期来看，我们只能猜测。从长远来看，金融科技和加密货币的破坏肯定是一个潜在的风险。我建议对这些讨论感兴趣的读者阅读Natalie Koo发表的分析。</blockquote> Conclusion and final thought<blockquote>结论和最后的思考</blockquote> This article analyzes Visa Inc (V), with a focus on its profit sustainability and scalability. This analysis examines the most two important aspects of profit Sustainability: return on capital employed (“ROCE”) and marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the two most fundamental aspects of the same central issue of profit Sustainability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.<blockquote>本文分析Visa Inc(V)，重点关注其利润可持续性和可扩展性。该分析考察了利润可持续性最重要的两个方面：已用资本回报率(“ROCE”)和已用资本边际回报率(“MROCE”)。对我来说，ROCE和MROCE是分析企业最重要的两个指标。它们揭示了利润可持续性这一核心问题的两个最基本的方面。ROCE告诉我们该业务迄今为止的盈利能力。MROCE深入了解了盈利能力可能走向的方向。</blockquote> The results show that:<blockquote>结果表明：</blockquote> <ul> <li>V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead.</li> <li>The ROCE has been on average about 103% and compares very favorably against overachievers which are exemplary scalable stocks.</li> <li>And the MROCE has been on average 157% in recent years. So this result suggests that V has not reached the stage of diminishing return yet - gravity has not caught up yet. It is truly impressive for a business at such a staggering scale (which processes $15 trillion of transaction volume last year) to still maintain perfect scalability.</li> <li>Lastly, this article also discusses its valuation, especially valuation adjusted for ROCE compared to other stocks that enjoy superb scalability using what I call the Buffett value line. V is currently way above the value line, showing its valuation to be only expensive by itself, but also when adjusted for its ROCE – even if it is superb ROCE.</li> </ul> As such, my final verdict is that it is still a perfectly scalable business, but it is more than perfectly priced. Investment at this point will take some time, patience, and commitment for the growth to catch up with the valuation. It is only for long-term committed investors (with at least 5+ years of time horizon) who could hold to it and sit out any potential near-term valuation volatilities.<blockquote><ul><li>V不仅在过去获得了持续较高的ROCE，而且在当前阶段仍然具有完美的可扩展性，表明未来将实现可持续利润。</li><li>ROCE平均约为103%，与表现优异的股票（典型的可扩展股票）相比非常有利。</li><li>近年来MROCE平均为157%。所以这个结果表明V还没有达到收益递减的阶段——重力还没有赶上。对于规模如此惊人（去年处理了15万亿美元的交易量）的企业来说，仍然保持完美的可扩展性确实令人印象深刻。</li><li>最后，本文还讨论了其估值，特别是与使用我看涨期权的巴菲特价值线享有卓越可扩展性的其他股票相比，根据ROCE调整的估值。V目前远高于价值线，这表明其估值不仅本身昂贵，而且在根据ROCE进行调整后也很昂贵——即使它的ROCE非常出色。</li></ul>因此，我的最终结论是，它仍然是一个完全可扩展的业务，但它的定价不仅仅是完美的。此时的投资需要一些时间、耐心和承诺，让增长赶上估值。它只适合长期承诺的投资者（至少有5年以上的时间范围），他们可以坚持下去，不受任何潜在的近期估值波动的影响。</blockquote>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Visa Stock: Scalability And Buffett Value Line<blockquote>Visa股票：可扩展性和巴菲特价值线</blockquote></title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 12.5px; color: #7E829C; margin: 0;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nVisa Stock: Scalability And Buffett Value Line<blockquote>Visa股票：可扩展性和巴菲特价值线</blockquote>\n</h2>\n<h4 class=\"meta\">\n\nSeeking Alpha2021-10-11 23:10\n\n</h4>\n</header>\n<article>\nSummary<blockquote>总结</blockquote> <ul> <li>This article analyzes Visa from the perspective of its profit sustainability and scalability.</li> <li>This analysis examines the most two important aspects of profit sustainability: return on capital employed (“ROCE”) and the marginal efficiency of capital.</li> <li>The results show that V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead.</li> <li>Lastly, this article also discusses its valuation, especially valuation adjusted for ROCE compared to other stocks that enjoy superb scalability using what I call the Buffett value line.</li> </ul> <img src=\"https://static.tigerbbs.com/ed4e9c2f1150ac54e1f764f98c0880f1\" tg-width=\"1536\" tg-height=\"1039\" width=\"100%\" height=\"auto\">Justin Sullivan/Getty Images News<blockquote><ul><li>本文从Visa的盈利可持续性和可扩展性的角度对其进行分析。</li><li>该分析考察了利润可持续性最重要的两个方面：已用资本回报率(“ROCE”)和资本边际效率。</li><li>结果表明，V不仅在过去获得了持续较高的ROCE，而且在当前阶段仍然具有完美的可扩展性，表明未来将实现可持续利润。</li><li>最后，本文还讨论了其估值，特别是与使用我看涨期权的巴菲特价值线享有卓越可扩展性的其他股票相比，根据ROCE调整的估值。</li></ul>贾斯汀·沙利文/盖蒂图片社新闻</blockquote> Investment thesis<blockquote>投资论文</blockquote> This article analyzes Visa Inc (V), with a focus on its profit sustainability and scalability. This analysis examines the most two important aspects of profit Sustainability: return on capital employed (“ROCE”) and marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the two most fundamental aspects of the same central issue of profit Sustainability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.<blockquote>本文分析Visa Inc(V)，重点关注其利润可持续性和可扩展性。该分析考察了利润可持续性最重要的两个方面：已用资本回报率(“ROCE”)和已用资本边际回报率(“MROCE”)。对我来说，ROCE和MROCE是分析企业最重要的两个指标。它们揭示了利润可持续性这一核心问题的两个最基本的方面。ROCE告诉我们该业务迄今为止的盈利能力。MROCE深入了解了盈利能力可能走向的方向。</blockquote> The results show that V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead. It is truly impressive for a business at such a staggering scale to maintain perfect scalability. Lastly, this article also discusses its valuation, especially valuation adjusted for ROCE and valuation compared to the other stocks that are exemplary scalable stocks (such as the FAAMG stocks and Buffett style stocks).<blockquote>结果表明，V不仅在过去获得了持续较高的ROCE，而且在当前阶段仍然具有完美的可扩展性，表明未来将实现可持续利润。对于规模如此惊人的企业来说，保持完美的可扩展性确实令人印象深刻。最后，本文还讨论了其估值，特别是根据ROCE调整的估值以及与其他示例性可扩展股票（例如FAAMG股票和巴菲特风格股票）相比的估值。</blockquote> The moat and the network effects<blockquote>护城河与网络效应</blockquote> V’s moat is in its scale and scalability, best demonstrated in the following two charts. The first chart shows the number of credit, debit, and prepaid cards in circulation worldwide from 2017 to 2019, with forecasts for 2023 and 2025. In 2019, there were 22.8 billion credit, debit, and prepaid cards in circulation worldwide. This figure is set to reach 29.31 billion by 2023, a 28% increase from the 2019 level. This figure will further increase to surpass 30 billion by 2025, a 34% increase from the 2019 level. In other words, the total cards in circulation will increase by more than 1/3 by 2025. The trend of digital transactions is unstoppable.<blockquote>V的护城河在于其规模和可扩展性，下面两张图表最好地展示了这一点。第一张图表显示了2017年至2019年全球流通的信用卡、借记卡和预付卡数量，并对2023年和2025年进行了预测。2019年，全球有228亿张信用卡、借记卡和预付卡在流通。到2023年，这一数字将达到293.1亿，比2019年的水平增长28%。到2025年，这一数字将进一步增加，超过300亿，比2019年的水平增长34%。也就是说，到2025年流通卡总量将增长1/3以上。数字化交易的趋势势不可挡。</blockquote> The second chart shows that V, as the leading player in this space, will benefit the most from this secular trend. V is the world’s largest retail electronic payments network providing processing services and payment product platforms. This includes credit, debit, prepaid, and commercial payments, which are offered under the Visa, Visa Electron, Interlink, and PLUS brands. Visa/PLUS is one of the largest global ATM networks. V facilitates digital payments across more than 200 countries and territories. It has 3.6 billion cards in circulation, about 16% of the total number of cards in circulation globally. It processes a mindboggling amount of transactions – 206 billion payment transactions and a total transaction volume of $12.5 trillion in 2020 – an undisputed dominance of the payment network.<blockquote>第二张图表显示，V作为该领域的领导者，将从这一长期趋势中受益最多。V是全球最大的零售电子支付网络，提供处理服务和支付产品平台。这包括信用卡、借记卡、预付费和商业支付，这些支付以Visa、Visa Electron、Interlink和PLUS品牌提供。Visa/PLUS是全球最大的ATM网络之一。V为200多个国家和地区的数字支付提供便利。它拥有36亿张流通卡，约占全球流通卡总数的16%。它处理了令人难以置信的交易量——2060亿笔支付交易，2020年总交易额为12.5万亿美元——这是支付网络无可争议的主导地位。</blockquote> <img src=\"https://static.tigerbbs.com/e261998de072e355b6f039912d0f1453\" tg-width=\"640\" tg-height=\"379\" width=\"100%\" height=\"auto\">Source: Statista<blockquote>资料来源：斯塔蒂斯塔</blockquote> <img src=\"https://static.tigerbbs.com/036bc8c94696fcfd8ed3403b699534c6\" tg-width=\"640\" tg-height=\"318\" width=\"100%\" height=\"auto\">Source: Visa USA.<blockquote>资料来源：美国签证。</blockquote> Furthermore, it is unlikely that such dominance would change in the future (barring any major regulation or antitrust legislation change) due to the so-called \"network effects\". The network effects refer to the fact that the value of certain products or services increases as more people use them. In other words, certain networks become increasingly more valuable as they become bigger. Not every network enjoys this magic feature, and as a matter of fact, most networks suffer a diminishing marginal rate of return – i.e., the additional return decreases as the network becomes bigger – as to be elaborated later. A chain restaurant network is an example. As the network becomes larger, the nodes begin to compete against each other for customers and the return diminishes.<blockquote>此外，由于所谓的“网络效应”，这种主导地位在未来不太可能改变（除非任何重大监管或反托拉斯法发生变化）。网络效应是指某些产品或服务的价值随着更多人使用而增加。换句话说，某些网络随着规模的扩大而变得越来越有价值。并不是每个网络都享有这种神奇的特性，事实上，大多数网络的边际回报率是递减的——即，额外回报随着网络变大而减少——这将在后面详细说明。连锁餐厅网络就是一个例子。随着网络变得更大，节点开始相互竞争客户，回报减少。</blockquote> But certain networks, like the services V provides, enjoy this magic trait – the network becomes more profitable as it becomes bigger. There is nothing new about the concept. It was true of railways, telephones, and fax machines. All these examples share these common traits: A) the larger the network becomes, the more valuable it becomes (one segment of a railway linking city A and B is far more valuable when this segment also links to other railways linking other cities); and B) the larger the network becomes, the higher the switching cost (if everyone uses a fax machine and you do not want to use one, good luck to you).<blockquote>但某些网络，如V提供的服务，享有这种神奇的特性——网络越大，利润就越高。这个概念没有什么新意。铁路、电话和传真机都是如此。所有这些例子都有这些共同的特征：a）网络变得越大，它就变得越有价值（当连接城市A和B的铁路的一段也连接到连接其他城市的其他铁路时，这段铁路的价值要高得多）；B）网络越大，交换成本就越高（如果每个人都使用传真机，而你不想使用传真机，祝你好运）。</blockquote> Again, there is nothing new about the concept. But the internet age dramatically amplified the potency of the network effects. Once a lead is established – for whatever the reason – the network effects would just kick in, take over, and compound itself.<blockquote>同样，这个概念没有什么新意。但是互联网时代极大地放大了网络效应的威力。一旦建立了线索——不管出于什么原因——网络效应就会开始发挥作用，接管并自我复合。</blockquote> It is a self-sustaining positive feedback loop: more users in this network will lead to more convenience, better efficiency, lower cost, which will make the network even better and more valuable for its users and clients, which will, in turn, attract more new users and clients to join and make it harder for existing users to leave, which again will lead back to more users and an even larger network. And such feedback will be reflected in a very high level of return on capital employed (“ROCE”) as to be seen later.<blockquote>这是一个自我维持的正反馈循环：这个网络中更多的用户将带来更多的便利、更好的效率、更低的成本，这将使网络对其用户和客户更好、更有价值，这反过来将吸引更多的新用户和客户加入，并使现有用户更难离开，这将再次导致更多的用户和更大的网络。这种反馈将反映在非常高的已用资本回报率（“ROCE”）中，这将在后面看到。</blockquote> Unfortunately, like all good things eventually run to an end, so do the benefits of the above network effects. At some point, gravity always catches up, and return begins to diminish. In the railway example, if enough railways have already been built to link all cities with high population density, building the next segment would suffer a diminished return now. In the fax machine example, if every office already has one, adding a second one to each office would also suffer a diminished return.<blockquote>不幸的是，就像所有美好的事情最终都会结束一样，上述网络效应的好处也会结束。在某些时候，重力总是赶上来，回报开始减少。在铁路的例子中，如果已经建造了足够多的铁路来连接所有人口密度高的城市，那么现在建造下一段铁路的回报将会减少。在传真机的例子中，如果每个办公室都已经有一台传真机，那么在每个办公室增加第二台传真机也会减少回报。</blockquote> Therefore, as investors, we do not only need to examine the ROCE, but also equally importantly, to examine the marginal return. Because the marginal return tells us if the business is still in a scalable stage, or if the business has already passed the tipping point of scalability and begins to see a diminishing return. In another word, MROCE let us see if the gravity of diminishing return has caught up yet or not.<blockquote>因此，作为投资者，我们不仅要考察ROCE，同样重要的是要考察边际收益。因为边际回报告诉我们业务是否仍处于可扩展阶段，或者业务是否已经过了可扩展性的临界点，开始出现收益递减。换句话说，MROCE让我们看看收益递减的严重性是否已经赶上了。</blockquote> And the remainder of this article will examine both aspects next.<blockquote>接下来，本文的其余部分将研究这两个方面。</blockquote> Return on capital employed (“ROCE”)<blockquote>已动用资本回报率（“ROCE”）</blockquote> ROCE stands for the return on capital employed. Note that ROCE is different from the return on equity (and more fundamental and important in my view). ROCE considers the return of capital ACTUALLY employed, and therefore provides insight into how effectively the business uses its capital to earn a profit. Readers interested in the details of the ROCE analysis can find them in my&nbsp;earlier article. Here I will just summarize the results in the chart below. In these results, I considered the following items capital actually employed A) Working capital (including payables, receivables, inventory), B) Gross Property, Plant, and Equipment, C) Research and development expenses are capitalized, and D) the intangible book value, mainly consisting of intellectual property and patents for such a business.<blockquote>ROCE代表已用资本回报率。请注意，ROCE不同于股本回报率（在我看来更基本、更重要）。ROCE考虑实际使用的资本回报，因此可以深入了解企业如何有效地利用其资本赚取利润。对ROCE分析细节感兴趣的读者可以在我之前的文章中找到。在这里，我将在下面的图表中总结结果。在这些结果中，我考虑了实际使用的以下项目资本a)营运资本（包括应付账款、应收账款、存货），B)不动产、厂房和设备总额，C)资本化的研发费用，以及D)无形账面价值，主要包括此类业务的知识产权和专利。</blockquote> As seen, it was able to maintain an astronomical level of ROCE over the past decade: on average ~103%. To put things in perspective, the next chart compares V’s ROCE against the FAAMG stocks – a group of businesses that exploits the network effects to the extreme. As can be seen, V earns a very competitive ROCE among them – only second to Apple (AAPL). Every $1 of earning reinvested will fuel more than $1 of additional future earnings growth on average.<blockquote>正如所见，它在过去十年中能够保持天文数字的ROCE水平：平均约103%。为了正确看待事情，下图将V的ROCE与FAAMG股票进行了比较，FAAMG股票是一组将网络效应发挥到极致的企业。可以看出，V在其中获得了极具竞争力的ROCE——仅次于苹果(AAPL)。平均而言，每1美元的收益再投资将推动超过1美元的未来收益增长。</blockquote> <img src=\"https://static.tigerbbs.com/877e3bb73de3e6c4fbab1a0133f74464\" tg-width=\"640\" tg-height=\"380\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha.<blockquote>资料来源：作者和Seeking Alpha。</blockquote> <img src=\"https://static.tigerbbs.com/9f25b4c6dc0c7ee738ac345c3888ae11\" tg-width=\"640\" tg-height=\"395\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha.<blockquote>资料来源：作者和Seeking Alpha。</blockquote> Introduction to marginal return on capital employed (“MROCE”)<blockquote>边际资本回报率（“边际资本回报率”）简介</blockquote> In addition to ROCE, an equally important concept is the marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the most fundamental two aspects of the same central issue of profitability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.<blockquote>除了ROCE之外，一个同样重要的概念是边际资本回报率（“MROCE”）。对我来说，ROCE和MROCE是分析企业最重要的两个指标。它们揭示了盈利能力这个核心问题的最基本的两个方面。ROCE告诉我们该业务迄今为止的盈利能力。MROCE深入了解了盈利能力可能走向的方向。</blockquote> A bit of background and introduction for readers who are new to the concept. For readers familiar with the concept already, definitely skip this section. From what I’ve learned, the legendary economist John Maynard Keynes first explicitly expressed this concept, although people before him have observed and thought about it for some time already. What the concept tries to capture is a basic law in economic activities: the law of diminishing returns. Warren Buffett likes to say that interest rate acts like gravity on all economic activities. Well, diminishing returns act like gravity on all economic activities too, if not more so, as long as human nature does not change in any fundamental way.<blockquote>为不熟悉这个概念的读者提供一点背景和介绍。对于已经熟悉这个概念的读者来说，一定要跳过这一部分。据我所知，传奇经济学家约翰·梅纳德·凯恩斯首先明确表达了这个概念，尽管在他之前的人已经观察和思考了一段时间。这个概念试图捕捉的是经济活动中的一个基本规律：收益递减规律。沃伦·巴菲特喜欢说，利率就像重力一样影响所有经济活动。嗯，只要人性不发生任何根本性的变化，收益递减对所有经济活动也有引力作用，如果不是更大的话。</blockquote> The next chart illustrates the concept. As long as shareholders are seeking profit, a public business will first invest its money at projects with the highest possible rate of return (i.e., picking the lowest hanging apples first or getting the most bang for the buck first). Therefore, the first batch of available resources is invested at a high rate of return – the highest the business can possibly identify. The second batch of money will have to be invested at a somewhat lower rate of return since the best ideas have been taken by the first batch of resources already, and so on. The last batch of money invested may earn a rate of return that is only above the cost of capital. And finally, the end result is a declining MROCE curve as shown.<blockquote>下一个图表说明了这个概念。只要股东寻求利润，上市企业就会首先将资金投资于回报率最高的项目（即，先摘最低的苹果或先获得最大的回报）。因此，第一批可用资源的投资回报率很高——企业可能确定的最高回报率。第二批资金将不得不以较低的回报率进行投资，因为最好的想法已经被第一批资源采纳了，等等。最后一批投入的钱可能会获得仅高于资金成本的回报率。最后，最终结果是如图所示下降的MROCE曲线。</blockquote> <img src=\"https://static.tigerbbs.com/f1cd59ec1a6da411c303c2bbccaf2425\" tg-width=\"640\" tg-height=\"460\" width=\"100%\" height=\"auto\">Source: author<blockquote>来源：作者</blockquote> The ROCE we normally talk about and companies report refers to the average of this curve – averaging the return on all batches of money invested. Obviously, the average is very useful information by itself. It tells us how efficiently the business has been converting resources into profit so far – but its limitation is that it only tells us the efficiency of the resources that have already been invested SO FAR. What is of equal importance to investors is the MROCE, which tells us how much incremental profit the business WILL generate when the next batch of resources are invested.<blockquote>我们通常谈论和公司报告的ROCE指的是这条曲线的平均值——平均所有批次投资的回报。显然，平均值本身就是非常有用的信息。它告诉我们企业到目前为止将资源转化为利润的效率——但它的局限性在于，它只告诉我们到目前为止已经投入的资源的效率。对投资者同样重要的是MROCE，它告诉我们下一批资源投入时，业务会产生多少增量利润。</blockquote> For investors, a dream business to invest in would be a business that enjoys a flat MROCE curve as shown by the solid blue line. This would be a business that is perfectly scalable. A business that earns a consistent and stable profit for every batch of resources invested. However, such a business is really only a dream business. I mentioned earlier that diminishing returns act like gravity on all economic activities - because they really do. There has been no business (at least not so far in human history) that can keep growing while at the same time maintaining a constant return on capital. At some point, gravity always catches up and the return begins to decline (as shown by the dashed blue line).<blockquote>对于投资者来说，梦想投资的企业是拥有平坦MROCE曲线的企业，如蓝色实线所示。这将是一个完全可扩展的业务。每投入一批资源都能获得持续稳定利润的企业。然而，这样的生意真的只是梦中生意。我之前提到过，收益递减对所有经济活动都有引力作用——因为它们确实如此。从来没有一个企业（至少在人类历史上没有）能够在保持资本回报率的同时保持增长。在某些时候，重力总是赶上来，回报开始下降（如蓝色虚线所示）。</blockquote> V’s MROCE<blockquote>V的MROCE</blockquote> So for investors, the next best deal is to invest in a business that A) has a high and stable ROCE, and B) that is still in the scalable stage (the gravity of diminishing return has not caught up yet). And as shown in the next chart, V seems to be such a business at such a stage.<blockquote>因此，对于投资者来说，下一个最好的交易是投资a）具有高且稳定的ROCE，B）仍处于可扩展阶段（回报递减的严重性尚未赶上）的企业。而如下图所示，V在这样一个阶段似乎就是这样一个业务。</blockquote> This chart shows the MROCE and ROCE for V over recent years. The ROCE data are the same as those shown in the previous section. The MROCE data are estimated by the following steps. First, the capital employed was calculated for each year. Second, the earnings were calculated each year. Third, then the incremental of capital employed year over year was calculated. Similarly, the incremental earnings year over year were also calculated. And finally, the ratio between the incremental earnings and incremental capital employed was calculated to approximate the MROCE. During years when there were large fluctuations in either the incremental earnings or the capital employed, a multi-year running average was taken to smooth the fluctuations.<blockquote>这张图表显示了近年来V的MROCE和ROCE。ROCE数据与上一节所示相同。通过以下步骤估计MROCE数据。首先，计算每年使用的资本。其次，每年计算收益。第三，计算每年使用的资本增量。同样，还计算了同比增量收益。最后，计算增量收益和增量资本使用之间的比率以近似MROCE。在增量盈利或资本使用波动较大的年度，采用多年运行平均法来平滑波动。</blockquote> Before we began to interpret the results, let me first clarify the difficulties of analyzing marginal return on capital and the limitations of the approach I used here. Firstly, it is just mathematically much harder to estimate the rate of change (e.g., which is what MROCE is essentially is) than the average change (which is what ROCE is essentially is). Estimating the latter involves dividing two large numbers and the uncertainties are small. Estimating the former requires dividing two small numbers and the uncertainties in the financial data can be magnified. Secondly, some capital investments in a business can take multiple years (more than 3 years) to bear fruit (or to fail). Therefore, isolating and tracking the marginal return produced by investments made in a given year is inherently difficult. Although most of the projects should begin to show results (either good or bad) in 3 years and this approach should be able to capture the dominating trend of marginal return.<blockquote>在我们开始解释结果之前，让我首先澄清分析边际资本回报率的困难以及我在这里使用的方法的局限性。首先，从数学上讲，估计变化率（例如，MROCE本质上是什么）比平均变化（ROCE本质上是什么）要困难得多。估计后者需要除以两个大数，不确定性很小。估计前者需要除以两个小数字，财务数据中的不确定性可以被放大。其次，对企业的一些资本投资可能需要多年（超过3年）才能取得成果（或失败）。因此，隔离和跟踪某一年投资产生的边际回报本质上是困难的。尽管大多数项目应该在3年内开始显示结果（无论是好的还是坏的），并且这种方法应该能够捕捉边际回报的主导趋势。</blockquote> With the above understanding, let’s look at the results closely. First, note that the extraordinarily high MROCE during the early part of the decade again provides a strong illustration of the network effects and the secular trend that support the business at a fundamental level. The business model is just too good.<blockquote>有了以上的了解，我们来仔细看看结果。首先，请注意，本世纪初极高的MROCE再次有力地说明了从根本上支持业务的网络效应和长期趋势。商业模式太好了。</blockquote> The results in the chart also show that at this stage, V has been actually able to maintain an MROCE that actually is higher than the average ROCE in recent years. As seen, the ROCE has been on average 103% in recent years, and the MROCE has been on average 157%. It was significantly lower than the 350+% level in the earlier part of the decade – gravity always tries to catch up. But it is still higher than the ROCE by a good margin. And the gap is more than 50%, too large to be caused by the uncertainties in the financial data and rounding off errors. So this result suggests that V has not entered a stage of diminishing return yet - gravity has not caught up yet. And if the current MROCE continues, V’s ROCE will maintain its current high level or even further expand.<blockquote>图表中的结果还显示，在这个阶段，V实际上能够保持实际上高于近年来平均ROCE的MROCE。可以看出，近年来ROCE平均为103%，MROCE平均为157%。这明显低于本世纪初350%以上的水平——重力总是试图迎头赶上。但仍远高于ROCE。而且差距超过50%，太大了，不可能是财务数据的不确定性和舍入误差造成的。所以这个结果表明V还没有进入收益递减阶段——重力还没有赶上。而如果目前的MROCE继续下去，V的ROCE将维持目前的高水平，甚至进一步扩大。</blockquote> <img src=\"https://static.tigerbbs.com/4cea9c214b6d0dd15d8f9c5c1392272e\" tg-width=\"640\" tg-height=\"398\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha data.<blockquote>资料来源：作者和Seeking Alpha数据。</blockquote> Valuation<blockquote>估值</blockquote> After the above discussion of its profitability sustainability, let’s look at the valuation. At its current price levels, V’s PE is about 44x and FW PE is about 39.6x. The valuation is both high in absolute terms and also high in relative terms. For example, when compared to the FAAMG pack, V’s current valuation is only lower than Amazon (AMZN) in terms of the PE multiple and higher than all the others.<blockquote>以上讨论完其盈利持续性，我们再来看看估值。在目前的价格水平上，V的PE约为44倍，FW PE约为39.6倍。估值无论是绝对值还是相对值都很高。例如，与FAAMG pack相比，V目前的估值仅低于亚马逊(AMZN)的市盈率，高于所有其他公司。</blockquote> It is not that meaningful to discuss valuation in isolation and without adjusting for the quality of the business. The next chart therefore also compares V valuation adjusted for its ROCE with its peers. If you are familiar with Buffett’s holdings, you would recognize that the stocks in this chart represent some of the large BRK holdings.<blockquote>如果不根据业务质量进行调整，孤立地讨论估值是没有意义的。因此，下一张图表还将根据ROCE调整后的V估值与同行进行了比较。如果您熟悉巴菲特的持股，您就会认识到这张图表中的股票代表了BRK的一些大型持股。</blockquote> I am not sure what the picture will look like as we add more data points on this chart (I do plan to organize my notes on other BRK major holdings and add more data points onto this plot). But with the few data points I have now, I cannot help drawing/seeing the green line - what I call a Buffett value line. It is a line linking AbbVie Inc (ABBV) and AAPL - a good business at a good price and a high-quality business at a high price. So from a value investor point of view, it only makes sense to make investments along this line or below it. Because investment along this line or below represents a trade-off between quality and price that is equivalent or better than ABBV or AAPL. It makes no sense to invest above this line, as anything above this line represents an inferior trade-off between quality and price - we'd be better off just investing in ABBV and AAPL.<blockquote>我不确定当我们在这张图表上添加更多数据点时，情况会是什么样子（我确实计划组织我对其他BRK主要持股的笔记，并在这张图表上添加更多数据点）。但凭借我现在掌握的几个数据点，我忍不住画出/看到了绿线——我看涨期权的巴菲特价值线。它是连接艾伯维公司（ABBV）和苹果公司的一条线——物美价廉的好企业和高价的高质量企业。因此，从价值投资者的角度来看，只有沿着这条线或低于这条线进行投资才有意义。因为沿着这条线或以下的投资代表了质量和价格之间的权衡，相当于或优于ABBV或AAPL。投资高于这条线是没有意义的，因为高于这条线的任何东西都代表着质量和价格之间的劣质权衡——我们最好只投资ABBV和AAPL。</blockquote> As you can see, V is currently way above the green line, showing a valuation that is only expensive by itself, but also when adjusted for its ROCE – even if it is superb ROCE.<blockquote>正如您所看到的，V目前远高于绿线，表明其估值不仅本身昂贵，而且在根据其ROCE进行调整后也很昂贵——即使它的ROCE非常出色。</blockquote> <img src=\"https://static.tigerbbs.com/6e9fbfdb9a53f0dac2386fcfaf067800\" tg-width=\"640\" tg-height=\"427\" width=\"100%\" height=\"auto\">Source: author and Seeking Alpha data.<blockquote>资料来源：作者和Seeking Alpha数据。</blockquote> Catalysts and risks<blockquote>催化剂和风险</blockquote> The long-term catalyst is the trend of digital transactions as mentioned at the beginning of the article. In my view, this trend is unstoppable. The expansive deployment of e-commerce platforms will further accelerate this transition.<blockquote>长期催化剂是文章开头提到的数字化交易趋势。在我看来，这个趋势是不可阻挡的。电子商务平台的广泛部署将进一步加速这一转变。</blockquote> The most significant catalyst and also a risk at the same time in the near term is the direction and the pace of the economic recovery. If economic activities and especially travel activities resume to their normal level, V will benefit significantly, as commented by the CFO:<blockquote>短期内最重要的催化剂，同时也是风险，是经济复苏的方向和步伐。正如首席财务官所评论的，如果经济活动，尤其是旅游活动恢复到正常水平，V将受益匪浅：</blockquote> \"We have seen immediate impacts since popular travel destinations opened their borders. Greece opened borders in April, and inbound card-present spend rose nearly 30 points by the end of June relative to 2019 levels. France opened on June 9, and inbound card-present volumes rose nearly 20 points by the end of June relative to 2019 ... Since April, card-present cross-border spend in Mexico from the U.S. rose nearly 50 points to over 170% of 2019 levels.\" Vasant Prabhu, Visa CFO (Q3 FY21 earnings call) In terms of risks, I see a valuation risk here as aforementioned. In terms of business fundamentals, I really do not see any risks in the near- or even long-term. The economic recovery from the pandemic mentioned above is not really a fundamental risk in my view. Even if it develops in the wrong direction and/or at a pace slower than expected, it is at most a temporary hiccup for V. The business model is too robust and too scalable. In the really long term, we can only speculate. The disruption from Fintechs and Crypto currency must be a potential risk in the long term. I suggest readers interested in these discussions to read the analysis published by&nbsp;Natalie Koo.<blockquote>“自从热门旅游目的地开放边境以来，我们已经看到了直接的影响。希腊在4月份开放了边境，到6月底，入境持卡消费相对于2019年的水平增长了近30个百分点。法国于6月9日开放，截至6月底，入境持卡量相对于2019年增长了近20个百分点...自4月份以来，从美国到墨西哥的持卡跨境消费增长了近50个百分点，达到2019年水平的170%以上。”Vasant Prabhu，Visa首席财务官（2021财年第三季度看涨期权收益）就风险而言，我看到了前面提到的估值风险。就业务基本面而言，我确实认为短期甚至长期没有任何风险。在我看来，上述疫情的经济复苏并不是真正的根本性风险。即使它朝着错误的方向发展和/或以比预期更慢的速度发展，对V来说也最多是暂时的打嗝。商业模式太健壮，可扩展性太强。从真正的长期来看，我们只能猜测。从长远来看，金融科技和加密货币的破坏肯定是一个潜在的风险。我建议对这些讨论感兴趣的读者阅读Natalie Koo发表的分析。</blockquote> Conclusion and final thought<blockquote>结论和最后的思考</blockquote> This article analyzes Visa Inc (V), with a focus on its profit sustainability and scalability. This analysis examines the most two important aspects of profit Sustainability: return on capital employed (“ROCE”) and marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the two most fundamental aspects of the same central issue of profit Sustainability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.<blockquote>本文分析Visa Inc(V)，重点关注其利润可持续性和可扩展性。该分析考察了利润可持续性最重要的两个方面：已用资本回报率(“ROCE”)和已用资本边际回报率(“MROCE”)。对我来说，ROCE和MROCE是分析企业最重要的两个指标。它们揭示了利润可持续性这一核心问题的两个最基本的方面。ROCE告诉我们该业务迄今为止的盈利能力。MROCE深入了解了盈利能力可能走向的方向。</blockquote> The results show that:<blockquote>结果表明：</blockquote> <ul> <li>V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead.</li> <li>The ROCE has been on average about 103% and compares very favorably against overachievers which are exemplary scalable stocks.</li> <li>And the MROCE has been on average 157% in recent years. So this result suggests that V has not reached the stage of diminishing return yet - gravity has not caught up yet. It is truly impressive for a business at such a staggering scale (which processes $15 trillion of transaction volume last year) to still maintain perfect scalability.</li> <li>Lastly, this article also discusses its valuation, especially valuation adjusted for ROCE compared to other stocks that enjoy superb scalability using what I call the Buffett value line. V is currently way above the value line, showing its valuation to be only expensive by itself, but also when adjusted for its ROCE – even if it is superb ROCE.</li> </ul> As such, my final verdict is that it is still a perfectly scalable business, but it is more than perfectly priced. Investment at this point will take some time, patience, and commitment for the growth to catch up with the valuation. It is only for long-term committed investors (with at least 5+ years of time horizon) who could hold to it and sit out any potential near-term valuation volatilities.<blockquote><ul><li>V不仅在过去获得了持续较高的ROCE，而且在当前阶段仍然具有完美的可扩展性，表明未来将实现可持续利润。</li><li>ROCE平均约为103%，与表现优异的股票（典型的可扩展股票）相比非常有利。</li><li>近年来MROCE平均为157%。所以这个结果表明V还没有达到收益递减的阶段——重力还没有赶上。对于规模如此惊人（去年处理了15万亿美元的交易量）的企业来说，仍然保持完美的可扩展性确实令人印象深刻。</li><li>最后，本文还讨论了其估值，特别是与使用我看涨期权的巴菲特价值线享有卓越可扩展性的其他股票相比，根据ROCE调整的估值。V目前远高于价值线，这表明其估值不仅本身昂贵，而且在根据ROCE进行调整后也很昂贵——即使它的ROCE非常出色。</li></ul>因此，我的最终结论是，它仍然是一个完全可扩展的业务，但它的定价不仅仅是完美的。此时的投资需要一些时间、耐心和承诺，让增长赶上估值。它只适合长期承诺的投资者（至少有5年以上的时间范围），他们可以坚持下去，不受任何潜在的近期估值波动的影响。</blockquote>\n<div class=\"bt-text\">\n\n\n 来源：<a href=\"https://seekingalpha.com/article/4459179-visa-stock-scalability-and-buffett-value-line\">Seeking Alpha</a>\n为提升您的阅读体验，我们对本页面进行了排版优化\n\n\n</div>\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"V":"Visa"},"source_url":"https://seekingalpha.com/article/4459179-visa-stock-scalability-and-buffett-value-line","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1174273121","content_text":"Summary\n\nThis article analyzes Visa from the perspective of its profit sustainability and scalability.\nThis analysis examines the most two important aspects of profit sustainability: return on capital employed (“ROCE”) and the marginal efficiency of capital.\nThe results show that V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead.\nLastly, this article also discusses its valuation, especially valuation adjusted for ROCE compared to other stocks that enjoy superb scalability using what I call the Buffett value line.\n\nJustin Sullivan/Getty Images News\nInvestment thesis\nThis article analyzes Visa Inc (V), with a focus on its profit sustainability and scalability. This analysis examines the most two important aspects of profit Sustainability: return on capital employed (“ROCE”) and marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the two most fundamental aspects of the same central issue of profit Sustainability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.\nThe results show that V not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead. It is truly impressive for a business at such a staggering scale to maintain perfect scalability. Lastly, this article also discusses its valuation, especially valuation adjusted for ROCE and valuation compared to the other stocks that are exemplary scalable stocks (such as the FAAMG stocks and Buffett style stocks).\nThe moat and the network effects\nV’s moat is in its scale and scalability, best demonstrated in the following two charts. The first chart shows the number of credit, debit, and prepaid cards in circulation worldwide from 2017 to 2019, with forecasts for 2023 and 2025. In 2019, there were 22.8 billion credit, debit, and prepaid cards in circulation worldwide. This figure is set to reach 29.31 billion by 2023, a 28% increase from the 2019 level. This figure will further increase to surpass 30 billion by 2025, a 34% increase from the 2019 level. In other words, the total cards in circulation will increase by more than 1/3 by 2025. The trend of digital transactions is unstoppable.\nThe second chart shows that V, as the leading player in this space, will benefit the most from this secular trend. V is the world’s largest retail electronic payments network providing processing services and payment product platforms. This includes credit, debit, prepaid, and commercial payments, which are offered under the Visa, Visa Electron, Interlink, and PLUS brands. Visa/PLUS is one of the largest global ATM networks. V facilitates digital payments across more than 200 countries and territories. It has 3.6 billion cards in circulation, about 16% of the total number of cards in circulation globally. It processes a mindboggling amount of transactions – 206 billion payment transactions and a total transaction volume of $12.5 trillion in 2020 – an undisputed dominance of the payment network.\nSource: Statista\nSource: Visa USA.\nFurthermore, it is unlikely that such dominance would change in the future (barring any major regulation or antitrust legislation change) due to the so-called \"network effects\". The network effects refer to the fact that the value of certain products or services increases as more people use them. In other words, certain networks become increasingly more valuable as they become bigger. Not every network enjoys this magic feature, and as a matter of fact, most networks suffer a diminishing marginal rate of return – i.e., the additional return decreases as the network becomes bigger – as to be elaborated later. A chain restaurant network is an example. As the network becomes larger, the nodes begin to compete against each other for customers and the return diminishes.\nBut certain networks, like the services V provides, enjoy this magic trait – the network becomes more profitable as it becomes bigger. There is nothing new about the concept. It was true of railways, telephones, and fax machines. All these examples share these common traits: A) the larger the network becomes, the more valuable it becomes (one segment of a railway linking city A and B is far more valuable when this segment also links to other railways linking other cities); and B) the larger the network becomes, the higher the switching cost (if everyone uses a fax machine and you do not want to use one, good luck to you).\nAgain, there is nothing new about the concept. But the internet age dramatically amplified the potency of the network effects. Once a lead is established – for whatever the reason – the network effects would just kick in, take over, and compound itself.\nIt is a self-sustaining positive feedback loop: more users in this network will lead to more convenience, better efficiency, lower cost, which will make the network even better and more valuable for its users and clients, which will, in turn, attract more new users and clients to join and make it harder for existing users to leave, which again will lead back to more users and an even larger network. And such feedback will be reflected in a very high level of return on capital employed (“ROCE”) as to be seen later.\nUnfortunately, like all good things eventually run to an end, so do the benefits of the above network effects. At some point, gravity always catches up, and return begins to diminish. In the railway example, if enough railways have already been built to link all cities with high population density, building the next segment would suffer a diminished return now. In the fax machine example, if every office already has one, adding a second one to each office would also suffer a diminished return.\nTherefore, as investors, we do not only need to examine the ROCE, but also equally importantly, to examine the marginal return. Because the marginal return tells us if the business is still in a scalable stage, or if the business has already passed the tipping point of scalability and begins to see a diminishing return. In another word, MROCE let us see if the gravity of diminishing return has caught up yet or not.\nAnd the remainder of this article will examine both aspects next.\nReturn on capital employed (“ROCE”)\nROCE stands for the return on capital employed. Note that ROCE is different from the return on equity (and more fundamental and important in my view). ROCE considers the return of capital ACTUALLY employed, and therefore provides insight into how effectively the business uses its capital to earn a profit. Readers interested in the details of the ROCE analysis can find them in my earlier article. Here I will just summarize the results in the chart below. In these results, I considered the following items capital actually employed A) Working capital (including payables, receivables, inventory), B) Gross Property, Plant, and Equipment, C) Research and development expenses are capitalized, and D) the intangible book value, mainly consisting of intellectual property and patents for such a business.\nAs seen, it was able to maintain an astronomical level of ROCE over the past decade: on average ~103%. To put things in perspective, the next chart compares V’s ROCE against the FAAMG stocks – a group of businesses that exploits the network effects to the extreme. As can be seen, V earns a very competitive ROCE among them – only second to Apple (AAPL). Every $1 of earning reinvested will fuel more than $1 of additional future earnings growth on average.\nSource: author and Seeking Alpha.\nSource: author and Seeking Alpha.\nIntroduction to marginal return on capital employed (“MROCE”)\nIn addition to ROCE, an equally important concept is the marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the most fundamental two aspects of the same central issue of profitability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.\nA bit of background and introduction for readers who are new to the concept. For readers familiar with the concept already, definitely skip this section. From what I’ve learned, the legendary economist John Maynard Keynes first explicitly expressed this concept, although people before him have observed and thought about it for some time already. What the concept tries to capture is a basic law in economic activities: the law of diminishing returns. Warren Buffett likes to say that interest rate acts like gravity on all economic activities. Well, diminishing returns act like gravity on all economic activities too, if not more so, as long as human nature does not change in any fundamental way.\nThe next chart illustrates the concept. As long as shareholders are seeking profit, a public business will first invest its money at projects with the highest possible rate of return (i.e., picking the lowest hanging apples first or getting the most bang for the buck first). Therefore, the first batch of available resources is invested at a high rate of return – the highest the business can possibly identify. The second batch of money will have to be invested at a somewhat lower rate of return since the best ideas have been taken by the first batch of resources already, and so on. The last batch of money invested may earn a rate of return that is only above the cost of capital. And finally, the end result is a declining MROCE curve as shown.\nSource: author\nThe ROCE we normally talk about and companies report refers to the average of this curve – averaging the return on all batches of money invested. Obviously, the average is very useful information by itself. It tells us how efficiently the business has been converting resources into profit so far – but its limitation is that it only tells us the efficiency of the resources that have already been invested SO FAR. What is of equal importance to investors is the MROCE, which tells us how much incremental profit the business WILL generate when the next batch of resources are invested.\nFor investors, a dream business to invest in would be a business that enjoys a flat MROCE curve as shown by the solid blue line. This would be a business that is perfectly scalable. A business that earns a consistent and stable profit for every batch of resources invested. However, such a business is really only a dream business. I mentioned earlier that diminishing returns act like gravity on all economic activities - because they really do. There has been no business (at least not so far in human history) that can keep growing while at the same time maintaining a constant return on capital. At some point, gravity always catches up and the return begins to decline (as shown by the dashed blue line).\nV’s MROCE\nSo for investors, the next best deal is to invest in a business that A) has a high and stable ROCE, and B) that is still in the scalable stage (the gravity of diminishing return has not caught up yet). And as shown in the next chart, V seems to be such a business at such a stage.\nThis chart shows the MROCE and ROCE for V over recent years. The ROCE data are the same as those shown in the previous section. The MROCE data are estimated by the following steps. First, the capital employed was calculated for each year. Second, the earnings were calculated each year. Third, then the incremental of capital employed year over year was calculated. Similarly, the incremental earnings year over year were also calculated. And finally, the ratio between the incremental earnings and incremental capital employed was calculated to approximate the MROCE. During years when there were large fluctuations in either the incremental earnings or the capital employed, a multi-year running average was taken to smooth the fluctuations.\nBefore we began to interpret the results, let me first clarify the difficulties of analyzing marginal return on capital and the limitations of the approach I used here. Firstly, it is just mathematically much harder to estimate the rate of change (e.g., which is what MROCE is essentially is) than the average change (which is what ROCE is essentially is). Estimating the latter involves dividing two large numbers and the uncertainties are small. Estimating the former requires dividing two small numbers and the uncertainties in the financial data can be magnified. Secondly, some capital investments in a business can take multiple years (more than 3 years) to bear fruit (or to fail). Therefore, isolating and tracking the marginal return produced by investments made in a given year is inherently difficult. Although most of the projects should begin to show results (either good or bad) in 3 years and this approach should be able to capture the dominating trend of marginal return.\nWith the above understanding, let’s look at the results closely. First, note that the extraordinarily high MROCE during the early part of the decade again provides a strong illustration of the network effects and the secular trend that support the business at a fundamental level. The business model is just too good.\nThe results in the chart also show that at this stage, V has been actually able to maintain an MROCE that actually is higher than the average ROCE in recent years. As seen, the ROCE has been on average 103% in recent years, and the MROCE has been on average 157%. It was significantly lower than the 350+% level in the earlier part of the decade – gravity always tries to catch up. But it is still higher than the ROCE by a good margin. And the gap is more than 50%, too large to be caused by the uncertainties in the financial data and rounding off errors. So this result suggests that V has not entered a stage of diminishing return yet - gravity has not caught up yet. And if the current MROCE continues, V’s ROCE will maintain its current high level or even further expand.\nSource: author and Seeking Alpha data.\nValuation\nAfter the above discussion of its profitability sustainability, let’s look at the valuation. At its current price levels, V’s PE is about 44x and FW PE is about 39.6x. The valuation is both high in absolute terms and also high in relative terms. For example, when compared to the FAAMG pack, V’s current valuation is only lower than Amazon (AMZN) in terms of the PE multiple and higher than all the others.\nIt is not that meaningful to discuss valuation in isolation and without adjusting for the quality of the business. The next chart therefore also compares V valuation adjusted for its ROCE with its peers. If you are familiar with Buffett’s holdings, you would recognize that the stocks in this chart represent some of the large BRK holdings.\nI am not sure what the picture will look like as we add more data points on this chart (I do plan to organize my notes on other BRK major holdings and add more data points onto this plot). But with the few data points I have now, I cannot help drawing/seeing the green line - what I call a Buffett value line. It is a line linking AbbVie Inc (ABBV) and AAPL - a good business at a good price and a high-quality business at a high price. So from a value investor point of view, it only makes sense to make investments along this line or below it. Because investment along this line or below represents a trade-off between quality and price that is equivalent or better than ABBV or AAPL. It makes no sense to invest above this line, as anything above this line represents an inferior trade-off between quality and price - we'd be better off just investing in ABBV and AAPL.\nAs you can see, V is currently way above the green line, showing a valuation that is only expensive by itself, but also when adjusted for its ROCE – even if it is superb ROCE.\nSource: author and Seeking Alpha data.\nCatalysts and risks\nThe long-term catalyst is the trend of digital transactions as mentioned at the beginning of the article. In my view, this trend is unstoppable. The expansive deployment of e-commerce platforms will further accelerate this transition.\nThe most significant catalyst and also a risk at the same time in the near term is the direction and the pace of the economic recovery. If economic activities and especially travel activities resume to their normal level, V will benefit significantly, as commented by the CFO:\n\n \"We have seen immediate impacts since popular travel destinations opened their borders. Greece opened borders in April, and inbound card-present spend rose nearly 30 points by the end of June relative to 2019 levels. France opened on June 9, and inbound card-present volumes rose nearly 20 points by the end of June relative to 2019 ... Since April, card-present cross-border spend in Mexico from the U.S. rose nearly 50 points to over 170% of 2019 levels.\"\n\n\nVasant Prabhu, Visa CFO (Q3 FY21 earnings call)\n\nIn terms of risks, I see a valuation risk here as aforementioned. In terms of business fundamentals, I really do not see any risks in the near- or even long-term. The economic recovery from the pandemic mentioned above is not really a fundamental risk in my view. Even if it develops in the wrong direction and/or at a pace slower than expected, it is at most a temporary hiccup for V. The business model is too robust and too scalable. In the really long term, we can only speculate. The disruption from Fintechs and Crypto currency must be a potential risk in the long term. I suggest readers interested in these discussions to read the analysis published by Natalie Koo.\nConclusion and final thought\nThis article analyzes Visa Inc (V), with a focus on its profit sustainability and scalability. This analysis examines the most two important aspects of profit Sustainability: return on capital employed (“ROCE”) and marginal return on capital employed (“MROCE”). To me, ROCE and MROCE are the most two important metrics for analyzing a business. They reveal the two most fundamental aspects of the same central issue of profit Sustainability. ROCE tells us how profitable the business has been or is SO FAR. And MROCE sheds insights into which direction the profitability is likely to go.\nThe results show that:\n\nV not only earns a consistently high ROCE in the past but is still perfectly scalable at its current stage, indicating sustainable profit ahead.\nThe ROCE has been on average about 103% and compares very favorably against overachievers which are exemplary scalable stocks.\nAnd the MROCE has been on average 157% in recent years. So this result suggests that V has not reached the stage of diminishing return yet - gravity has not caught up yet. It is truly impressive for a business at such a staggering scale (which processes $15 trillion of transaction volume last year) to still maintain perfect scalability.\nLastly, this article also discusses its valuation, especially valuation adjusted for ROCE compared to other stocks that enjoy superb scalability using what I call the Buffett value line. V is currently way above the value line, showing its valuation to be only expensive by itself, but also when adjusted for its ROCE – even if it is superb ROCE.\n\nAs such, my final verdict is that it is still a perfectly scalable business, but it is more than perfectly priced. Investment at this point will take some time, patience, and commitment for the growth to catch up with the valuation. It is only for long-term committed investors (with at least 5+ years of time horizon) who could hold to it and sit out any potential near-term valuation volatilities.","news_type":1,"symbols_score_info":{"V":0.9}},"isVote":1,"tweetType":1,"viewCount":996,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":3,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/826923242"}