Only a handful of publicly traded companies have a market cap exceeding $1 trillion. Apple reached the milestone in 2018, followed by Microsoft in 2019, and Alphabet in 2020. More recently, Amazon returned to the $1 trillion club in early 2023, followed by Nvidia shortly thereafter.
Several other companies could soon join this elite group. Tesla has a market cap of $850 billion, Meta Platforms is valued at $750 billion, and Berkshire Hathaway is worth $745 billion and all three have solid growth trajectories. Investors should also consider Visa (V -0.48%) as a candidate. The company may be a dark horse compared to other contenders given its market cap currently sits at $495 billion, but its strong presence in the digital payments market could propel that figure to $1 trillion by 2033.
Visa has a strong competitive position
Visa reported solid financial results for the second quarter. Revenue rose 11% year over year to $8 billion -- reflecting a 10% increase in total payment volume and a 12% jump in processed transactions -- and GAAP earnings soared 20% year over year to $2.03 per share. Visa is well-positioned to maintain that momentum in the future.
The investment thesis is simple: Electronic payments are becoming more common at physical and digital points of sale, and Visa operates the largest electronic payments network in the world as measured by acceptance locations and purchase transaction volume. That scale hints at immense brand authority and it arises from a powerful network effect. In other words, Visa has built trust with merchants and consumers around the world, and its network becomes increasingly valuable to merchants as more consumers join, and it becomes increasingly convenient for consumers as more merchants join.
Enormous scale also gives Visa a material cost advantage. Payment processing is a highly scalable business, meaning it costs next to nothing to process each incremental transaction once the necessary infrastructure is in place. That dynamic explains why Visa has a significantly higher operating margin than smaller rivals like Mastercard, American Express, and Discover Financial Services. It also lays a path for Visa to become increasingly profitable as its transaction volume grows in the future.
Finally, that cost advantage creates a virtually impenetrable moat around the business, because Visa could use its margins to undercut rivals on price if necessary. That possibility keeps new players away from the payment card market, and it prevents existing rivals from taking the crown. In short, Visa is well-positioned to maintain its leadership in digital payments.
Visa has a massive market opportunity
Visa handled transactions totaling $14.3 trillion over the past year, representing about 6% of the $226 trillion market opportunity the company outlined during its 2020 investor day event. At the time, management said its addressable market created a path to tenfold growth over the next 20 years, implying a market cap of $4.4 trillion by 2040. If that does indeed happen, reaching $1 trillion by 2033 should be easy, but let's dig into the numbers.
The global credit card payment market is expected to grow by 7.1% annually through 2030, according to Vantage Market Research. Meanwhile, the broader digital payments market is expected to expand by 20.8% annually over the same time period, according to Grand View Research. Visa should land somewhere in the middle. Opportunities in account-based payments and value-added services should help offset slower growth in credit card revenue, so the company could reasonably grow its top line by 10% per year annually over the next decade.
Visa could be a $1 trillion company by 2033
Visa currently has a market cap of $495 billion and shares trade for 16.1 times sales, a slight discount to their five-year average of 18.2 times sales. But if revenue increases by 10% annually over the next decade -- a reasonable estimate given that Visa grew revenue by 10.8% annually over the last decade -- its market cap could reach $1 trillion by 2033, while its valuation would fall to a more reasonable 12.4 times sales.
All else being equal, shareholders would see returns of 7.2% annually if Visa doubled its market cap during the next 10 years. But the company has historically created additional value for shareholders by repurchasing stock and paying dividends. In fact, Visa reduced its outstanding share count by 2% annually over the last decade, and its dividend yield currently sits at 0.73%. As a result, Visa's market cap increased by 315% over the past decade, but the stock returned a total of 442%.
So what? The combination of market cap appreciation, stock repurchases, and quarterly dividend payments means shareholders could see returns of 10% annually (or greater) over the next decade. In other words, Visa has a decent shot at outperforming the S&P 500 during the next 10 years -- just as it has over the past 10 years -- and that's a compelling reason to buy a few shares of this growth stock today.
