What you believe and what you value as an organization matters. Discover the DNA of our firm.
Get to know our teams and the stories of select staff members who share why they choose to work at Sands Capital.
Read about some of the latest events, partnerships, and business highlights from Sands Capital.
Changing market and geopolitical environments are part of the equation for long-term investors. As active investors, we are prepared to manage through trying times.
Papercup’s proprietary AI dubbing solutions provide high-quality, inexpensive voiceover and video localization.
Executive Managing Director and Sr. Portfolio Manager Brian Christiansen discusses the importance of candor and collaboration in a culture that promotes long-term thinking.
Recruit Holdings is transforming the world of work through wage transparency and providing life-changing opportunities for immigrants and refugees.
Our philosophy is rooted in the belief that, over time, stock prices will reflect the earnings power and growth of the underlying businesses.
Our latest annual report offers a comprehensive view of how we add value through active stewardship.
Our newest strategy takes an unconstrained approach to seeking the best growth businesses outside of the U.S.
Sands Capital invests in innovative businesses across all stages of the growth spectrum
Michael Raab, Portfolio Manager, Sr. Research Analyst
Sunil Thakor, Sr. Portfolio Manager, Research Analyst
This episode of What Matters Most dives into the evolutionary journey of Visa, a titan in the payments industry. Discover how the company continues to thrive by enabling innovation. Join Sands Capital Portfolio Managers Sunil Thakor and Michael Raab as they unpack the company’s history, technology, and the formidable network that cements its position as an industry leader. From IPO to the present, we dissect the anatomy of Visa’s enduring success.
[3:35] A toll operator on the great financial highway
[4:27] Getting to the core of payment infrastructure
[6:27] An exception to the no-IPO rule
[9:50] What’s driving Visa’s growth (hint: it’s not credit)
[10:56] The cash-based culture factor
[13:06] 5 pillars of our conviction in Visa
[14:32] Cryptocurrencies and blockchain: friend or foe?
[25:04] Are inflation and a possible consumer recession headwinds?
[27:48] Visa vs. Mastercard: Why Visa?
[33:06] A differentiated view through a long-term lens
[00:00:01] Kevin: Yeah. All right.
[00:00:02] Suni: Whatever works.
[00:00:03] Kevin: Here we go.
[00:00:06] Welcome to What Matters Most, Sands Capital’s podcast series, in which we explore some of the trends and businesses that are propelling the pace of global innovation and changing the way we live and work today and into the future. Today, we’re taking the podcast in a slightly different direction. In many of the past episodes, we’ve focused on companies that are at the forefront of rapid change and innovation, companies pushing the envelope in quickly evolving industries like semiconductors, ecommerce, and mobility. In cases like that, what matters most is usually the ability to anticipate or even create the massive wave of change that’s just around the corner.
[00:00:40] Today, we’re looking at a different kind of company, a company that was certainly in the change agent seat decades ago but now is a company where what matters most is not rapid change but the persistent unfolding of that change over the next several decades. It’s a story characterized by the steady and long-term migration away from a traditional way of doing something—in this case, paying for stuff—to a more efficient, secure, and effective way of doing pretty much that same thing. Today, we’re exploring the history, technology, and future of money through the lens of Visa, one of the most influential companies in the world of payment.
[00:01:15] In essence, Visa operates a network of networks, enabling fast, secure, and convenient transactions for millions of people and businesses every day. But it’s clearly a very well-known company, operating in what many assume to be a globally ubiquitous credit and debit market. As such, you might ask, how does one generate a differentiated insight into this investment? What do we see that others are missing?
[00:01:40] Fortunately, our guests today are here to tackle that question and more. So we’re joined today by two returning guests, portfolio managers Sunil Thakor and Michael Robb, to dive into what matters most about Visa, one of our longest-owned holdings at Sands Capital. And I must say there’s no better duo to cover this topic. We’ve invested in the company since its IPO [initial public offering] in 2008, and both Suni and Mike were instrumental in leading the charge on that investment case. So Mike, Suni, thanks so much for joining me today.
[00:02:13] I’ve been able to see a lot of the history firsthand during my time at Sands Capital, the history behind this investment. But I certainly don’t know the details to the degree that you two do. So why don’t we start by having you give us a quick overview of what the company actually does? I think there’s a lot of misunderstanding out there about what Visa is and how it operates within the global payment ecosystem. I know I have a pocket full of credit cards here. And I think a lot of folks assume those credit cards are issued by the Visas and MasterCards of the world, but that’s not accurate, is it?
[00:02:48] Mike: Yeah, being a credit card issuer couldn’t be further from the truth for Visa. And it was a common misconception 15 years ago at the IPO [initial public offering], and you still run into people that don’t quite know exactly what they do. At its core, it’s a digital network that connects thousands of card-issuing banks, like Chase or Bank of America, with millions of merchants and billions of consumers and cardholders. It is a huge, huge network, and it sits at the chokepoint of this sort of immense landscape of businesses and processors and banks and entities and regulations that are necessary for you to swipe your card or pay for something online and have it go through in a matter of seconds and be comfortable that it’s safe, secure, and convenient.
[00:03:35] Kevin: I’ve heard it described as basically a toll operator on the great financial highway. Is that an accurate description?
[00:03:45] Mike: Yeah, that’s exactly what it is. It’s a plumbing network, it’s a railroad, a toll operator, and that’s what makes it special. When you look at the landscape of payments companies, you know, when I started to do the original research, and actually to tell that story goes all the way back to really my first day at Sands Capital in 2007.
[00:04:03] So I came to work with Suni, and he looks at me and says, “You know, MasterCard IPO’ed, in 2006. I missed it. I need to know about what’s going on here in the payments world. Clearly, something’s interesting. I don’t understand it. Can you spend some time looking at it?” And so, you know, of course, the first thing I did was zoom out and say, “What is this payment space?”
[00:04:27] And man, did I learn, it was very complicated. But it was also really quite simple to see where the chokepoint was. And that was with, at the time, Visa and MasterCard. And what you see is: You have the card-issuing banks on one end. They’re the ones that take the credit risk if you’re using a credit card or the ones where your bank account is stored, right? Those funds are being moved when you pay in the debit transaction.
[00:04:52] Those are really regulated entities. In the developed world, they usually don’t grow that fast, and they haven’t really been in the Sands Capital wheelhouse. In emerging markets, there are some interesting ones, but that sits on one side.
[00:05:05] Then, there are all these transaction services, these transaction processors that interface with the banks. And there are hundreds, probably even thousands of them that help funnel the transaction into the Visa network. It hits the Visa network. Then it hits, and you can break this landscape down into smaller chunks, but I’ll use more of an umbrella term of merchant acquirers. And these merchant acquirers are really the feet on the street that sign up merchants to take card payments. And that has really evolved now into being much more sophisticated with companies like Square or Adyen in the digital space that provide the dashboards and really operating systems that some small businesses are using—or do all kinds of currency conversion, things for online merchants that are accepting cross-border payments—but they tailor the experience to the merchant, and the Visa transaction flows through them. So Visa is really right at the middle of things.
[00:06:04] And now there are some interesting companies on the periphery here, but when you use all the toolkit that we have in terms of analyzing competitive advantage and network effects and Porter’s Five Forces, very clearly there’s something special going on here. Visa and MasterCard are unique assets in the world on this front. And that’s what I started to dig in and investigate. You know, is this sustainable?
[00:06:27] Kevin: Excellent. Because you touched on it a little bit, maybe go into a little more detail on how you came across this idea. You mentioned, Suni, that you were looking at MasterCard and thought you’d missed it. And Visa popped up. Tell us about the whole process of covering or, I guess, better understanding this company when it wasn’t public yet. Was that a challenge? Is this your typical IPO, or was there something more unique to it?
[00:06:49] Suni: You know, the Visa IPO is the first IPO that Sands Capital ever participated in. And we had historically—not had a firm policy, but essentially a custom of—not investing in IPOs because typically they’re not very good investments.
[00:07:04] Kevin: A guideline, more of a guideline than a rule.
[00:07:06] Suni: More of a guideline than a rule. And, you know, typically, IPOs are below the offering price some number of months out if the bankers have done their job and priced it right. So we had typically avoided them, but the difference with Visa that we saw very quickly was this was not a new company, as most IPOs are. This was a 50-year-old business that was demutualizing and going public.
[00:07:28] That being said, as a company that was private prior to coming public, you just had less information. The payment space was not as well covered or as well developed, at least as far as financial markets were concerned and financial analysts were concerned. And so the kind of analysis and data availability you have today … we had to gather a lot of that data point by data point and find a few obscure trade associations.
[00:07:50], But I think, you know, one of the important things about Visa that we recognized quickly is the idea that it is operating at a chokepoint. And a pattern that we have seen in multiple investments over time is that when you have multisided markets where each side is highly fragmented, the industry structure that works best for all participants is one with a standard bearer, a standard setter in the middle, some sort of a chokepoint that everything runs through.
[00:08:22] So standards bringing together highly fragmented end markets that need to work together are naturally occurring phenomena in different business spaces. And we’ve seen that in financial exchanges. We’ve seen that in mobile chip design that has design standards that are used commonly in the industry.
[00:08:44] And so you see this in a number of industry spaces. And when we appreciated this was a four-sided market where you have merchants, customers, merchant acquirers, and banks, and literally billions of nodes in that system, the idea that the world would consolidate down to a couple of networks in the middle and that that network effect would create a very durable, competitive moat. That’s something we realized early on, even without having really detailed, publicly available financial information on Visa.
[00:09:18] Mike: I think, you know, to add to that, we’re talking about where it sits as a chokepoint in the value chain was a critical component. And then one of the next steps was, say, what was the secular trend behind it? And you can find companies that are at chokepoints, but they don’t necessarily grow at above-average rates. They may have a sustainable business, but you know … and this shift from paper-based payments to electronic payments is something I would describe as an unstoppable force. We’re not going backwards.
[00:09:50] Suni: An underappreciated element of Visa’s growth driver is … A lot of people refer to it as a credit card company. And credit is not the growth driver of the business. And it’s more accurately referred to as a payment card company. And the reason I say that is that these plastic cards, or now the electronic manifestations that we might have on our phones, are replacements for cash. So as credit availability or consumer credit ebbs and flows, that does not really have a very big impact on Visa’s growth potential and growth rate in any given period. It’s about personal consumption, and it’s about penetrating different spend categories in different geographies and converting different forms of payments to electronic payments via cards. The idea that credit is linked to the long-term secular growth trend is really an underappreciation of the size of the addressable market.
[00:10:56] Kevin: So let’s talk about that a little bit more. I’m going to ask you to provide some details if you have them. I think people listening to this podcast are going to conjure up images of all the stores now that used to take cash only, no credit cards, but now take no cash, only credit cards. I mean, it seemed like an overnight shift. And, it can convince us that we aren’t fully penetrated on the credit. Who’s still using cash and where are the opportunities there to convert more of those cash users to credit and debit users?
[00:11:27] Mike: I’ll give you a couple layered answer here, but when it comes to cash, I’ll just say the reason some of these businesses were requiring cash is because it clears at par, and there’s no small fee for accepting credit and debit and, you know, for all the security that you get around it. But it’s completely irrational because, one, cash is dirty. The pandemic helped with that: No one wanted to touch it. There’s shrinkage on cash. People steal it. And it takes time to, you know, go to the bank and deposit it. And, I’ve seen studies done where you look at the cost of accepting cash is actually higher than accepting debit and credit. But these are ingrained behaviors, and they take a long time to work through.
[00:12:12] So you still have that, but I want to zoom out a bit and highlight that our experience, sitting here in the United States, is very different, especially in a city. Then you’ll see even more when you move out into rural areas, or you go even into Western Europe or particularly emerging markets, you have situations where the vast majority is still done in cash or other non-electronic forms of payment. So that secular trend is still happening. But I will concede that it’s further along than it was 15 years ago.
[00:12:45] But when you actually look at the growth that has been in the broader pie of PCE [personal consumption expenditures] as well as some new areas that Visa can penetrate, the addressable market in front of Visa is bigger, really, than it was when I underwrote the investment case with Suni back in 2008. So there’s a long way to run.
[00:13:06] Kevin: Let’s stay on that for a minute because, basically, what we’re diving into here is the pillars of your investment case. So, pillar one is a steady shift from paper to electronic payments. I don’t think that alone would give it a spot in the portfolio. I could be wrong, but, tell me, what else do we need to know about the company that makes it special?
[00:13:26] Mike: When I first wrote up the case, you know, we have a process at Sands Capital about what matters. That’s what we’re talking about today. You know, we can do all of our numbers and details, but really getting the investment case right boils down to just a couple of key things, and if those go the right way, you likely have a good financial outcome.
[00:13:43] For Visa, I came up with five things. And it was that steady shift from paper-based to electronic payments. The second was that there would be stable to slightly declining net pricing. There was a big fear that Visa was dumb pipes for a while and that pricing was going to really, really get pressured. That hasn’t happened. And then there would be meaningful operating leverage, right? Those go a little bit hand in hand, but we needed to see a lot of operating leverage. Then, we needed to see continued dominance of the networks in this electronic payment. So basically, very little disintermediation risk. And finally, Visa needed to successfully navigate legal and regulatory risk at the company, which was much more of a concern back in the 2000s than it is today.
[00:14:32] Kevin: OK, so one point you just made there that I’d like to spend a little time on is the continuing dominance of electronic payments. A little disintermediation is what you said.
[00:14:42] You know, from time to time, this is sort of past, but there’s probably some current examples of this as well. You hear about these new technologies, you know, blockchain being the one that’s a little bit more in the rearview mirror now, or maybe even beyond more specific than blockchain, crypto, and DeFi [decentralized finance] taking share away from the traditional payment networks.
[00:15:05] Suni: You know, one of the challenges that any potential disruptive threat would have, and this is where you come back to first principles. Durability of competitive advantage is probably the single most important criterion enabling a company to sustain growth for an extraordinarily long period of time.
[00:15:25] And I think we would argue that Visa has among the most durable competitive moats that we have seen in our investment careers, at least in our opinion. And what sustains it is, if you play this thought experiment: I’m going to come up with Company X to try to disrupt Visa. What do I need to do just to be equivalent?
[00:15:47] Well, first, I need to connect billions of consumers, millions of merchants, and thousands of banks all together, and I need to do it in a cost-competitive way, but I have to do it when there’s already an acceptable option that gets the job done. And otherwise, there’s just no way to really do it. Because no bank wants to issue a new card that no merchant accepts, no merchant wants to have the overhead of accepting a card that no one has in their wallets, and nobody wants to carry around a card that they can’t use at every store.
[00:16:19] And so when you walk through that game, that mental experiment to say, what is it that really sustains the competitive moat? What does the network effect look like on the ground, and how would you disrupt it if you were given unlimited time and unlimited capital? It’s really, really hard in this particular case, just given the number of nodes in the system that would have to be replicated out of the gate just to be equivalent.
[00:16:45] Mike: Yeah, one of the latest ones was cryptocurrency and the blockchain-related payments. And I’ll just say, you know, crypto to me is this sort of libertarian dream, when it comes to payments, that never posed a real threat to the entrenched payment system. I think it captured the attention of people, but when you’d really dig into the technology and crossing the chasm in terms of the chicken-and-egg problem that was so difficult for Visa to do, it really has never come close.
[00:17:16] if you actually look at crypto and blockchain, it can’t even process enough transactions at the speed necessary to be a consumer payments platform. It can be a money transfer tool in some cases, maybe some uses in cross-border, but to really think that you’re going to pay at the point of sale with bitcoin at mass, and all of us are going to do it. And a bunch of people that really don’t care about what they’re paying with to begin with, they just want it done, are going to shift. It never had a chance. I haven’t seen any threat of a business, a certain cryptocurrency, or bitcoin, that’s made a dent in the Visa or MasterCard network.
[00:17:54] Now, the more likely situation is that if it was a technology that was interesting is that Visa and MasterCard adopt it. And they have whole teams that work on that and can leverage the blockchain technology. Let’s make their own network more efficient and better and address new use cases where that might work.
[00:18:15] So that’s what I learned on that one. And there’s a whole host of other threats we can run through. I think those would be fun stories to unpack now, sometimes 10-plus years later.
[00:18:27] Kevin: All right. Let’s talk about some of the current and potentially emerging disruptors, disintermediators, and threats that can generally fall into the category of fintech [financial technology] or new developments in the financial technology space, thinking specifically of the Squares and buy now, pay later opportunities that would probably disintermediate some of the revolving credit space. Touch on any of that. What do you see on the horizon that you’re keeping an eye on and potentially could see as a threat?
[00:18:57] Mike: Absolutely. These threats pop up every now and then, and with the benefit of hindsight, you know, some of them seem so silly at the moment. Would you believe it or not, but years ago, there was a potential threat that Verizon and AT&T were going to team up, and somehow that was going with mobile phones and that was going to disintermediate Visa. And that was at a time when you couldn’t cross the street without having your call dropped, and yet you’re going to rely on that as a consumer payment network.
[00:19:22] I mean, that was a serious threat, a legitimate fear in the market for some time. We took it seriously and looked into it but realized that it just wasn’t feasible. You know, today, I get asked about, buy now, pay later all the time. I get asked about Square, Adyen, and some of these merchant acquirers. So let me just bucket those actually and say a lot of these are not threats. They’re actually opportunities and different companies innovating and building new on-ramps.
[00:19:48] You know, I think a lot of people understand this about Square now, but you know, there were a lot of small businesses and small-ticket merchants that were taking cash. They were not accepting cards. They started using Square. And the only thing that was different for the consumer is they knew it as Square. They didn’t just know it as some odd terminal where they swiped their card that they didn’t know what the brand was. They knew Square, so they thought, “Well, for sure, that must be bad for Visa.” And they forgot to look down at their hand and see the brand on the card that they were swiping across was Visa. So there are transactions going across the Visa network that would never have hit it without Square. Square is one of the best things to happen to Visa. So is PayPal, the biggest client of Visa for a very, very long time.
[00:20:39] Now, there are some real threats that are there, but they end up being kind of like ankle-biter situations that are worth monitoring. On PayPal, there’s a way where you can link your ACH [the Automated Clearing House for electronic funds transfer] to your bank account and pay and not use your credit or debit card from Visa or MasterCard. That’s disintermediation. You know, we don’t like that one, but that’s been put in check and has reached a natural limit where it likely doesn’t scale anymore after 20-plus years of that product and some high-level jostling between Visa and PayPal in terms of how they steer customers. That’s not a mainstream threat anymore.
[00:21:14] And buy now, pay later is the one that really popped up. That’s companies like Affirm or Afterpay, which is now owned by Square, where you, you basically have a credit product that you can sign up for quickly and pay through a company like Affirm. But what people forget is you then need to pay that buy now, pay later company that lent you the money.
[00:21:37] And usually the thing that’s worked is you pay in four installments. Now, do you know that the instrument that people mostly use to pay those four installments is their Visa or MasterCard? There are other options but, similar to PayPal, most people choose to pay—they want to pay—with their Visa and MasterCard because it’s secure, it’s known, it’s easy. And Visa actually makes more money on those transactions because four $10 transactions is better than one $40 transaction for Visa, because you get four processing fees. You still get $40 for the ad valorem [the total on which fees apply], but you get four transaction processing fees on $10 instead of one processing fee on $40.
[00:22:18] So again, I would say it’s just a form factor shift, really, and not a major threat. This type of thing goes on and on, you know, in the history of Visa and the threats that come up. It’s analyzing them and having that deep domain expertise to really understand what’s happening. And I credit that to our model that allows analysts to not be overloaded with coverage to really spend time getting to know their businesses, getting to know their industries so that we can filter so much noise that is out there in the world on our businesses down into a what-matters lens that helps us translate that into, you know, is this helping, hurting, breaking, or strengthening our investment case?
[00:23:01] Kevin: Or benign completely?
[00:23:03] Mike: Which is usually the case.
[00:23:06] Kevin: I remember all the ink spilled on the day that Costco …
[00:23:09] Mike: Oh, yeah.
[00:23:10] Kevin: … either dropped MasterCard or dropped Visa. I can’t remember which one, but it would seem, you know, it was like the end of the business.
[00:23:17] Mike: It’s usually Visa because that’s where the negotiation is a lot of the time. So being a bigger company, that happens all the time.
[00:23:24] So every time I see that, I’m like, OK, something’s going on. And it’s always in some specific country. Like it’s not in the United States, it’s just in Canada or just in London or something. And it’s all a test to see what happens. And then invariably, a month or two later, something is announced, and an agreement is made, and we move forward because when you think of the total cost of processing these payments and paying Visa or paying the interchange rate to the banks, it’s a drop in the bucket relative to losing sales or irritating your customers. They’re waiting to pay, you should let them pay.
[00:23:59] Kevin: On that same general idea, are there any significant nodes that you would worry about if they dropped Visa—like Amazon or something— would that make a difference?
[00:24:10] Mike: What you see with some of these big merchants is what happens is they have their own store-brand cards. And, you know, if you see a store-brand card that doesn’t … it’s not what’s called open loop, meaning it has a Visa or MasterCard logo on it. It can only be used at that store. Target is an example that’s been really successful with that red card. Amazon has one. I actually have one of those cards myself. But the trend is actually more toward having a store-brand card but then also having a Visa or a MasterCard network capability on it. So I see that being sort of the ankle-biter type situation where there’s a use case for some merchants, and you provide some extra bit of loyalty for them in the form of a discount—5% seems to be the hurdle to really get consumers to shift it—but you’re giving up 5%. You’re giving up much less of that to Visa and MasterCard. So I don’t see that being an existential threat.
[00:25:04] Kevin: So great. I think we touched a lot on the case for owning the company. Maybe talk a little bit about what keeps you up at night about this company? Like what could go wrong?
[00:25:15] Mike: Not much. We’re always vigilant. I mean, the moat is big, and things pop up over time, and I’m constantly on the lookout. And so, I’ve been the analyst for 15 years on this business. And upfront, I did a lot of work, and before it IPO’d, I probably researched the space for about a year in preparation. We knew it was coming, and we didn’t know exactly when, so there was a lot of foundational work.
[00:25:39] And then there had been these moments over the course of the period when there were these decision points that we may not necessarily have added or trimmed or anything, but there was a lot of active decision-making and doing nothing. And these threats pop up, right, and I get a bunch of questions, and, you know, I have to research something, but I always bring it back to the what-matters framework,
[00:26:00] Kevin: What about a consumer recession? Would that impact the company? Maybe talk about how vulnerable the company would be to a recession.
[00:26:08] Mike: I wouldn’t put it in a business that’s in the cyclical bucket. Personal consumption expenditure is very stable, you know, macroeconomic factor that’s driving the underlying payments trend. But the secular trend on top of that grows faster than personal consumption. Then, you have the ability for Visa to flex back on costs. It spends a lot of money on marketing that it can pull back pretty quickly, and it generates a lot of free cash flow. And right now it is buying back, you know, 2 percent to 3 percent of its share base a year and can easily accelerate that, you know, 100 percent free cash flow conversion, and it provides a nice cushion to any macroeconomic environment.
[00:26:53] So in a recessionary environment, from a portfolio perspective, it’s certainly not the company that pops up, that says, OK, here’s something to really be concerned about.
[00:27:03] Kevin: and what about an inflationary environment?
[00:27:06] Mike: I mean, that’s one of the beauties of the model. There’s a fee based on the transaction, each transaction, regardless of the ticket size. And then there’s an ad valorem fee based on the dollar amount. And what we’ve noticed is businesses with ad valorem-based pricing, what’s nice is they have built-in inflation protection. Not even the pricing power necessarily to pass through pricing. It’s just built in.
[00:27:31] And then on top of that, there’s not a set schedule necessarily annually, but Visa has generally been increasing prices for its processing and servicing as it’s rolled out additional features for its customers, over the years. And I expect that to continue.
[00:27:48] Kevin: One question I get a lot when talking about this company is—that’s why I have to ask it here—Why Visa over MasterCard?
[00:27:56] Suni: That’s funny. Fifteen years on, I’m still angry at myself for missing MasterCard. So maybe we should have owned MasterCard, but at least that mistake led to doing research on Visa and not making the same mistake twice.
[00:28:08] Mike: You know, In the early days of the investment, there were a lot more differences between the companies. At the time of the IPO, Visa had greater protection from the legal risk in the shareholder structure. It was still unresolved what was going to happen. I mean, these are very, very big antitrust settlements that have set the record for dollar amounts. And Visa minority share was high protection, MasterCard didn’t.
[00:28:36] Visa, especially 15 years ago, was by far the leader in debit. MasterCard wasn’t. And I think the main difference that still makes me more comfortable with Visa today is it’s twice the size of MasterCard. And if push comes to shove in a real competitive environment, Visa likely wins because it has more firepower. It also is typically more the rule maker in the industry and the trendsetter and the lead innovator on several new products that have hit over the years. They’re both fantastic businesses though.
[00:29:10] Kevin: Yeah. I mean, it’s two good choices. You know, so pick one and you won’t go wrong. It seems like Visa is a case that fits this idea that a lot of the world’s intellectual power is spent trying to figure out what’s going to change, when it really should be spent trying to figure out what won’t change and making sure that you’re more aware or levered to that. Because the probability of figuring out what’s going to change is pretty low, whereas certain things will stay the same, you know, five, 10, 15 years from now.
[00:29:41] Suni: But you know, Kevin, I think that’s exactly right. A funny story—Mike and I were at a Visa analyst day, maybe five or six years ago. And about halfway through, I leaned over to Mike, and I said, Mike, the investment case here is exactly the same as it was at the IPO. It’s just the numbers are bigger. And we both got a chuckle out of that. That basically ended up being, I think, the intro sentence to the note that was written after.
[00:30:09] Mike: And I think you’re right, Kevin, that some things stay the same. And this is a case of a company that has ground it out over 15 years. And, you know, going back again all the way back to my early time at Sands Capital, you know, you hear all these stories of, you know, some of the best businesses that we found over our 30-year period.
And I was talking to one of my colleagues, Dave Levanson, who, you know, has been there right from the beginning. And I said, you know, “How do I get a 10-bagger? You know, the company, that stock, that can be up 10x from the beginning. How do I do that?” And he said, “Stop trying.” I didn’t really understand the wisdom of that until I’ve seen the power of compounding play out.
[00:30:48] You know, we look out into the future and everything, but thinking out 15-plus years and what compounding can do is not something you’re really necessarily thinking about on day one of your investment case. You know, it’s out there, but then you experience it, and you say, OK, that’s what we’re doing for these types of businesses. A deep moat that can grind out above-average growth, mid-teens to 20% for a really, really long time. And, you know, we’re 15 years in and, here’s the thing, I just don’t see it slowing. We might have another 15 years in front of us because I haven’t changed that what-matters framework in my investment case.
[00:31:24] But there is an additional growth driver that I’m considering making that part of the what-matters pillars, and that’s what I call new flows into Visa. We’ve talked about consumer payments, but there’s business-to-business payments. There’s P2P, person-to-person transfers that you’ve seen. There’s insurance payouts, government-to-consumer payouts, and all kinds of other things where money is moving from one area to the next. And Visa has been building out capabilities to do that. The economics are all a little bit different in each case, and, you know, it works a little differently than consumer payments to get the incentives right.
[00:32:01] But the volume that is there is way bigger than consumer payments, and that’s really interesting when you think of what the duration of Visa could be. You know, we might have another decade or two in front of us of above-average growth.
[00:32:17] Kevin: So forgive my naiveté. Is that basically saying, you know, businesses will start collecting receivables through credit card and debit card payments or as simple as that?
[00:32:28] Mike: Yeah, and the economics don’t look exactly the same. It could be through card payments. It could be something that Visa is calling Visa Direct, but that looks more like a bank transfer but is much more secure using the debit network and it doesn’t necessarily have to be floating a credit. But you’re tailoring the piping to the experience of the transaction. And that’s what it’s all about.
[00:32:50] And there’s a big, big opportunity to penetrate that market. And it’s just starting to take off. It’s always been this little thing on the horizon. I remember thinking about it back in the early days. And now it’s becoming real. And I think it’s becoming a major part of the case.
[00:33:06] Kevin: Interesting. I guess one thing we haven’t really touched on as much as maybe we had planned to is to talk about your differentiated view of the business versus the rest of the investment world.
[00:33:20] Suni: Yeah, Kevin, our view of our own differentiated insight into Visa has shifted over the years. At the time of the IPO, we understood pretty quickly that this was ultimately going to be a very high-margin company just because its incremental margins are extraordinarily high because of its asset-light nature.
[00:33:37] Kevin: Yeah, I remember back in the day, you would say that they spend so much on advertising around the Olympics just to keep their margins lower and not raise the interest of regulators. That’s always stuck in my mind.
[00:33:49] Suni: It’s very true. And it has played out that way. I think at this point, we have to acknowledge this is one of the larger market caps in the world. It’s one of the most widely covered, widely owned businesses in the world. And I think we understand it extraordinarily well. But I don’t think I can credibly stand here and say we understand it better than the average investor. And this gets to the core of what I think is one of Sands Capital’s competitive advantages, which is the differentiation of our lens and looking at our investments through a longer-term lens than most other investors, in our view.
[00:34:27] And so we have always viewed the ebbs and flows in Visa’s business differently than, say, the broader market or the average investor. We look at a lot of that as noise because the real prize we’re playing for are some of the things Mike’s talked about around entering new categories, new geographies, and growing the ultimate addressable market and focusing on the shift from paper-based forms of payment to plastic.
[00:34:53] Sometimes, that gets overwhelmed in the short run by macroeconomic factors. In our view, it doesn’t change the investment case. And so I think that time horizon and that lens through which we view the business is maybe not a differentiated insight but a differentiated way of viewing the same set of information. But as you can see from, you know, the value added over a long-term holding period, that’s a valuable differentiated lens. And I think one of the interesting things about Visa, you know, relates to the idea of how do you find a 10-bagger? Just stop trying. It’s never been that outstanding of a stock in any given year.
[00:35:36] It’s had good years. It’s had bad years. But it’s more often than not been kind of in the middle in terms of if you were to look at portfolio level attribution, but it’s that consistency compounded year after year after year, driven by the earnings compounding year after year after year, and the cash flow and that free cash flow being used to let the earnings per share compound a little bit faster. And, you know, the real returns in Visa have been generated quietly over a long period of time.
[00:36:10] Kevin: Excellent. Well, I think, you know, I’ve run through my questions. Any thoughts you want to add or leave us with?
[00:36:18] Suni: Yeah, you know, honestly, I don’t really have much to add. I mean, this is really one where it’s about the investment case. It’s the compounding slowly over time. It’s the durability of the moat. It’s the don’t get shaken out by the noise along the way.
[00:36:35] Mike: Yeah, I could go all, I could go all day with this stuff.
[00:36:42] Kevin: All right. So, Mike, Suni, thanks so much for joining me today.
[00:36:45] Suni: You guys should all know that Dave Levanson is standing right over here mocking me.
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed are current as the episode date and are subject to change. This material may contain forward-looking statements, which are subject to uncertainties outside of Sands Capital’s control. The securities identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio. You should not assume that any investment is or will be profitable. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. For more information, including a full list of portfolio holdings, please visit our website at www.sandscapital.com.
As of November 30, 2023, Visa was held in the Select Growth, Global Growth, Global Leaders, Technology Innovations, and Global Shariah strategies. Adyen was held in the Global Growth, Technology Innovators, International Growth and Global Shariah strategies. Square is owned by Block, which was held in the Select Growth, Global Growth, Technology Innovators and Focus strategies. Mastercard was not held in any Sands Capital strategies.
Disclosures:
The featured podcast portfolio companies represent a subset of Sands Capital holdings that illustrate the types of businesses in which we typically invest. The series uses rotation whereby companies are selected to highlight different sectors and geographies.
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. Forward earnings projections are not predictors of stock price or investment performance, and do not represent past performance. References to companies provided for illustrative purposes only. The portfolio companies identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio or that securities sold have not been repurchased. You should not assume that any investment is or will be profitable. GIPS® Reports found here.
This communication is for informational purposes only and does not constitute an offer, invitation, or recommendation to buy, sell, subscribe for, or issue any securities. The material is based on information that we consider correct, and any estimates, opinions, conclusions, or recommendations contained in this communication are reasonably held or made at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, or recommendations. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.
In the United Kingdom, this communication is issued by Sands Capital Advisors – UK Ltd (“Sands UK”) and approved by Robert Quinn Advisory LLP, which is authorised and regulated by the UK Financial Conduct Authority (“FCA”). Sands UK is an Appointed Representative of Robert Quinn Advisory LLP.
This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (the “Act”) and the handbook of rules and guidance issued from time to time by the FCA (the “FCA Rules”). This material is for information purposes only and does not constitute an offer to subscribe for or purchase of any financial instrument. Sands UK neither provides investment advice to, nor receives and transmits orders from, persons to whom this material is communicated, nor does it carry on any other activities with or for such persons that constitute “MiFID or equivalent third country business” for the purposes of the FCA Rules. All information provided is not warranted as to completeness or accuracy and is subject to change without notice. This communication and any investment or service to which this material may relate is exclusively intended for persons who are Professional Clients or Eligible Counterparties for the purposes of the FCA Rules and other persons should not act or rely on it. This communication is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Something has gone wrong, check that all fields have been filled in correctly. If you have adblock, disable it.