A trillion dollars isn't as insurmountable a market cap goal as it used to be.
We now have seven companies -- excluding state-run organizations -- that have achieved market capitalizations of $1 trillion after Nvidia shares rocketed higher earlier this summer. Tesla and Meta Platforms now have market capitalizations of less then $1 trillion, but have passed that milestone previously, while Amazon, Apple, Microsoft, and Alphabet have been consistently above $1 trillion for years now. These dynamic technology stocks have crushed the market in recent years, providing life-changing returns for many of their long-term investors.
But what about the next stock that might join the trillion-dollar club? This is perhaps a more valuable question for investors to consider. You don't make money owning a stock based on what it has done in the past. I think payments network operator Visa (V -0.23%) is the most likely company to join the trillion-dollar market cap club within the next few years. Here's why.
Dominant competitive position, industry tailwinds
Visa operates the leading credit card and digital payments network around the world, processing $14.1 trillion in transaction volume in its fiscal 2022. It currently has more than 4 billion credit and debit cards in circulation. Because it is only a payments network, not a credit card issuer, Visa earns tiny fees on every payment transaction made through its network, but it takes minimal lending risks.
With around a 40% market share of global credit card transactions, Visa has a competitive advantage that's nearly insurmountable, which should keep it insulated from any upstart networks. According to the company, more than 100 million merchant locations accept Visa cards. Merchants are unlikely to add a raft of new payment options for their customers unless they love wasting time and confusing shoppers. They generally choose to accept Visa because of its ubiquity. And consumers and banks favor it because they know virtually every merchant in the world will accept a Visa card.
Cashless forms of payment have multiple tailwinds that Visa should be able to ride for the foreseeable future. Most important is the steady transition of consumer activity away from physical cash. More and more people around the globe are using credit cards and mobile phone apps to pay for things, which means more payments flowing through the Visa network. The company also benefits from inflation as it earns a percentage on every dollar processed through the Visa network. If inflation is 3% a year and Visa maintains its market share, that will add about 3% to its annual revenue growth.
The math behind a $1 trillion valuation
Outside of periods of market frothiness, high-quality businesses of Visa's caliber typically trade at price-to-earnings ratios in the 25 to 30 range. Today, Visa trades at the top of that range. It has a market cap of $493 billion, so it would need to roughly double to breach the $1 trillion threshold.
Let's assume Visa will trade at about the same earnings ratio in the coming years as it does today. That means it would need to double its net income to join the trillion-dollar market cap club. I think it can do so in five years.
How? First, I predict that it will be able to increase revenue at about 10% annually as it rides the transition to digital payments and benefits from global inflation. Second, with close to 100% incremental margins on new revenue, Visa has incredible operating leverage. That should lead to margin expansion as it grows. Today, its operating margin is an impressive 67%, but there is still room for it to go higher.
With a combination of 10% annualized revenue growth and margin expansion, Visa could grow its bottom line by 15% per annum. At that pace, it would double its earnings in five years. Considering that most companies outside of the big tech realm are far away from a trillion-dollar market cap, I think this gives Visa a good chance at being the next company to hit that milestone.
Data source: YCharts.
Who could beat Visa?
Visa is currently the 11th-largest company in the world by market cap. Two stocks ahead of it that haven't crossed the $1 trillion mark yet are the pharmaceutical giant Eli Lilly and Warren Buffett's diversified conglomerate Berkshire Hathaway.
I wouldn't be too afraid of Berkshire Hathaway getting there first, because it focuses on slower growing, steady value investments. Eli Lilly could be a wild card as sales of its new weight-loss drugs are growing like gangbusters and are projected to hit $100 billion annually by 2035. However, it does trade at a price-to-earnings ratio of about 80, which gives it much more downside risk than Visa.
Another strong candidate is Taiwan Semiconductor Manufacturing, which has a market cap slightly lower than Visa's. The leading third-party computer chip foundry is growing quickly and has huge industry tailwinds at its back. As long as geopolitical threats from China don't kill the business, there's a possibility it will beat Visa to the $ trillion milestone. But the geopolitical risks are real for Taiwan Semi, which leads me to think Visa has a better chance of crossing the threshold first.
At the end of the day, it doesn't matter if Visa is the next company to join the trillion-dollar market cap club. All that matters to shareholders is whether Visa is increasing its earnings per share and building value. Over the long term, those things will lead to stock price appreciation and wealth accumulation for its investors.
