Dominating the Payments Landscape
Visa operates differently from traditional banks that issue credit cards, as it does not extend credit and eliminates default risk from its business model. This approach has proven highly profitable, with a consistent operating margin averaging 66% over the past five years. Additionally, Visa’s scale is truly impressive, with a 61% market share in the U.S. based on the dollar value of its transactions, totaling $3.8 trillion in the fourth quarter of 2023.
The company benefits substantially from the increasing popularity of digital transactions, which offer greater convenience and safety compared to cash or checks. Despite a significant portion of Americans still preferring cash, there is considerable potential for growth even in highly developed economies. Visa is poised to capitalize on this trend, ensuring continued growth in its payments volume over the next five years.
The Potential Threat of Fintech Companies
The payments industry is highly dynamic, with continuous innovation and frequent disruptions. Nonetheless, Visa has maintained a favorable position due to its wide competitive moat, particularly with its network effects. Operating in over 200 countries and territories and facilitating 276 billion transactions in fiscal year 2023, Visa’s vital role in the global economy solidifies its competitive position.
Although fintech companies such as PayPal, Block, Adyen, and Stripe have seen remarkable success, they should not be seen as a direct threat to Visa shareholders. In fact, these fintech firms provide services and tools that can contribute to the acceleration of digital payments and cashless transactions, ultimately benefiting Visa in the long run.
While valuation plays a significant role in investor returns, predicting the exact valuation five years from now is impossible due to various factors, including interest rates. Presently, Visa shares trade at a price-to-earnings ratio of 32.8, which is lower than the stock’s trailing five-year average. Assuming the shares maintain the same multiple in five years and diluted earnings per share continue to rise at a 13% annualized rate (slightly lower than the past five years), investors can expect a double-digit return.