Five years have passed since Apple became the first publicly traded company to achieve a $1 trillion valuation, but a few others have followed in its footsteps. Just six companies can call themselves members of the $1 trillion club:
- Apple: $2.7 trillion valuation
- Microsoft: $2.5 trillion valuation
- Saudi Aramco: $2.2 trillion valuation
- Alphabet: $1.7 trillion valuation
- Amazon: $1.5 trillion valuation
- Nvidia: $1.1 trillion valuation
The odds are good that the list will be much longer in a decade. A few companies are already within striking distance of the $1 trillion threshold, and several more are headed in that direction. For instance, Visa (V -0.10%) is currently worth $500 billion, and that figure could rise 200% to $1.5 trillion by 2033 as the secular shift toward digital payments continues.
Here's what investors should know.
Visa is a leader in global payments
Visa operates the largest payments network in the world in terms of purchase transactions and acceptance locations, and that scale is the foundation of an enviable cost advantage. Visa consistently earns higher profit margins than smaller competitors like American Express and Mastercard because it can spread expenses over more transactions.
Those profits mean Visa can invest more in its business, and management is focused on three growth vectors: consumer payments, new flows like commercial cards and account-based payments (direct transfers from one account to another), and value-added services. Visa is very well positioned to capitalize on all three opportunities due to its superior cost structure and brand authority.
How big is the opportunity? Consumer spending exceeded $53 trillion in 2021, according to the World Bank, and Visa says its network can support another $185 trillion in new flows with account-based payments platform Visa Direct and commercial cross-border platform Visa B2B Connect. That means Visa is targeting a $238 trillion opportunity, yet the company handled just $14.5 trillion over the past year.
In other words, Visa has captured about 6% of its volume-based market opportunity, and that figure excludes value-added services like consulting and risk-management products. But the company is making progress on all three fronts. Former CEO Al Kelly said consumer payment credentials jumped 13% last year, and constant-currency revenue from new flows and value-added services climbed 20% and 19%, respectively, in the quarter ending June 30 this year.
The outlook for the global payments market
Global payments revenue increased 8.3% annually over the last five years, according to Boston Consulting Group. That total includes transaction-related revenue generated by card and non-card payment methods like account-based transactions. It also includes revenue unrelated to transactions that are generated from value-added services.
Visa outpaced the industry average over the last five years, with revenue increasing by 10% annually. Similar outperformance is likely in the future due to its brand authority and scale. For context, Boston Consulting Group says global payments revenue will increase at 6.2% annually over the next five years, so investors can reasonably expect Visa to grow revenue by around 8% annually.
However, the cost advantages afforded Visa by its scale, coupled with diligent cost control, led to substantial profit-margin expansion over the last five years. That allowed Visa to grow net income at 16% annually during that time, much faster than its top line, and a similar dynamic is likely in the future. Indeed, the Wall Street consensus currently calls for annual earnings-per-share (EPS) growth of 14% over the long term.
Why Visa could be a $1.5 trillion company by 2033
Visa stock currently trades at 30.6 times earnings, a discount to its five-year average of 35.4, and the company is worth $500 billion. But its market cap could increase by 200% to hit $1.5 trillion over the next decade if (1) net income grows at 12% annually and (2) the stock trades at 30 times earnings in 2033.
Both assumptions seem reasonable. The net income growth roughly aligns with the industry forecast and analyst expectations, and the valuation seems plausible in this context: Apple is forecast to grow EPS by 10.5% annually, but the stock trades at 29.5 times earnings. In other words, the market gives Apple an earnings multiple near 30 despite the baked-in expectation for slower earnings growth.
If Visa is indeed worth $1.5 trillion by 2033, shareholder returns would be 11.6% annually on price appreciation alone. However, it has consistently paid a quarterly dividend since 2008, and it has increased each year since 2013, so the total return could exceed 11.6% annually. That makes this growth stock a compelling investment.
It's worth mentioning that Visa provided a more aggressive outlook at its 2020 Investor Day, with management forecasting tenfold growth over the next 20 years. The company had a market cap of $443 billion at the time.
