Looking at past stock market winners can be a smart strategy for figuring out what companies can outperform going forward. The thinking is that successful businesses in the past should continue thriving in the future, and the market should keep rewarding them.
If we look at the last decade, we'll see that Visa (V -0.23%) shares have soared more than 400%. That fivefold gain easily beats the 155% rise of the broader S&P 500. But it's not a shocker that long-term investors rightfully care about the next few years when making portfolio decisions.
Where will this top financial stock be in three years? Continue reading to learn more about what I think Visa's future holds.
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The same old story
Between fiscal 2020 and fiscal 2023 (ended Sept. 30), Visa's revenue increased at a compound annual rate of 14.3%. Its diluted earnings per share (EPS) rose at an annualized pace of 19.2%. Given that the past three years have included the coronavirus pandemic, supply chain issues, inflationary pressures, increasing interest rates, and geopolitical turmoil, these strong growth rates are impressive.
It's not too hard to figure out why Visa has achieved such remarkable and consistent success. One key reason is the secular trend that's benefiting the business. That's the rise in popularity of credit cards and cashless transactions. The number of Visa-branded cards in circulation around the world currently stands at 4.3 billion, up 23% from 3.5 billion three years ago. What's more, Visa's processed payment volume totaled $3.2 trillion last fiscal quarter, a massive sum that gives the business over 60% share of the U.S. card market.
To be clear, there is absolutely no reason to expect that Visa's success won't continue over the next three years. I believe this way because of the company's powerful network effects. Merchants need to accept Visa cards; otherwise, they will lose a massive chunk of their customer base. And consumers want these cards in their wallets due to their universal acceptability. This creates a scenario where the larger the network becomes, the more valuable it is to existing and new users.
These network effects make Visa's competitive position virtually unassailable. Astute readers might point to some successful fintech businesses, like PayPal and Block, as disruptors. But these two actually help spur the advancement of digital payments, and this can end up helping Visa because more transactions will be done without the use of cash. This gives me confidence that Visa isn't under any kind of competitive threat.
A potential headwind
Investors are bullish on the fact that Visa's fundamentals, particularly revenue and earnings growth, will continue to impress. And this provides the necessary recipe to produce strong stock returns. In fact, consensus estimates call for revenue and diluted EPS to rise by 10.4% and 14.7% between fiscal 2023 and 2026, solid forecasted gains.
However, investors need to think about a possible headwind to market outperformance. And that's the valuation. As of this writing, Visa shares trade at a price-to-earnings (P/E) ratio of 30.4. This represents a 50% premium to the S&P 500's P/E multiple of 20.2.
The question to ask is whether Visa's valuation ratio will decline in the next three years, an unfavorable situation that will pressure the stock price. It's anyone's guess as to what the P/E multiple will be in three years. There are simply way too many factors that can impact this, most especially investor sentiment, which is totally unpredictable.
But it's very encouraging to know that Visa's P/E ratio is the same as it is today. And it's 27% lower than it was three years ago. Based on the recent past, the valuation appears to be reasonable. And there's certainly a valid argument to be made that it's worth paying up for such a high-quality enterprise. Therefore, it wouldn't be out of the question that Visa generates strong returns going forward.
