Where Will Visa Stock Be in 5 Years?

Payment network operator Visa (V -0.23%) has beaten the market decisively since the company went public in 2008 (up 1,530% compared to 217% for the S&P 500). But it's been a different story more recently. The S&P 500 outperformed Visa over the past three years, and investors might be wondering whether the stock can regain its market-beating ways.

Looking ahead at both Visa's growth opportunities and the circumstances around the stock today should offer some insight into what investors can expect moving forward. Let's look at where Visa stock might be five years from now.

Visa's underperformance explained

Visa stock is up about 13.1% over the past three years, compared to 23.7% for the S&P 500. Apparently, investors are not valuing the stock as much now as they did several years ago. Further proof of this investor concern can be seen in Visa's price-to-earnings ratio (P/E). Visa's ratio averaged nearly 35 over the past decade, a premium to the broader market's historical average of 16, largely because of its growth and highly profitable business model.

The chart below shows that Visa's valuation soared at the start of the pandemic and peaked near a decade-long high in mid-2021 before coming back down. Sometimes a stock doesn't have to have a complicated backstory for why it goes up or down. In Visa's case, it looks like the stock's valuation got too hot, which typically gets rectified (eventually) if a company's performance can't justify the higher price tag. In short, valuations matter.

V PE Ratio data by YCharts

Warren Buffett once said it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. You can see above that Visa's valuation seems reasonable, given what the market's been willing to pay for the stock over the years. Visa's earnings-per-share (EPS) have grown by an average of 20% annually over the past decade, twice as fast as the broader market's historical return rate. Prolonged market-beating growth justifies a premium valuation on the stock.

Cashless growth could drive long-term returns

Visa is a payments processing network; when you swipe a payment card, information travels back and forth on Visa's network between the merchant and the bank to verify funds and complete the transaction. Visa is the world's largest payment network; it supports roughly 40% of the world's cashless payments, which is even more impressive if you back out the 32% controlled by UnionPay, China's government-controlled network.

The global economy has been steadily shifting away from cash for years, but there is still a lot of growth to be had -- especially in emerging markets. According to accounting firm PwC Global estimates, cashless payment volumes could double worldwide by 2030. Though payments are highly competitive, Visa should grow with the industry as the market leader.

V Free Cash Flow (% of Annual Revenues) data by YCharts

Visa makes money by charging a small fee for each transaction on its network, which is already up and running and requires little investment and upkeep as it grows. You can see above that Visa's a remarkably profitable business and has become more lucrative over time. Today, a whopping 61% of every revenue dollar becomes free cash flow.

Where might the stock be in five years?

Analysts are optimistic about Visa's outlook; estimates call for EPS growth averaging 15% annually over the next three to five years. This is a notch below the company's earnings growth rate for the next decade, so I will factor that in by assuming that Visa's current valuation (also below its long-term average) remains constant moving forward.

You can project out Visa's EPS over the next five years. Assuming 15% annual EPS growth, you get the following:

Source: Chart created by the author.

Apply Visa's current P/E of 32 to get a resulting share price of $470 per share, or 105% in potential price returns. This is rough math, and the stock's actual returns could easily be higher or lower due to under- or overshooting growth or changes in the stock's valuation.

But the exercise helps paint a picture of the stock's range of outcomes, which you can use to decide if the stock fits your investment strategy. Those looking for a dependable and proven stock with a nice upside for price-based returns could do well with Visa over the next several years.