Only six companies worldwide now have a market cap of more than $1 trillion. If Visa (V -0.23%) reached this threshold, it would be a big deal. However, with Visa worth about $535 billion now, it would have to nearly double to join this exclusive club.
But could Visa do this by 2030? Let's find out.
Visa's margins allow it to produce a massive amount of cash
Visa is a company nearly anyone in the U.S. would recognize. Many consumers carry its credit or debit cards, but Visa doesn't manage the debt or bank accounts behind them. Instead, Visa processes the transactions every time a card is used. This business model is similar to competitor Mastercard's business but different from American Express, which holds consumers' debt on its balance sheet.
Visa's toll-booth business model, which takes a small fee each time its network is used, is one of the best out there. Once the network is set up, it requires little additional cost to operate, allowing the company to post top-notch profit margins. Visa's business exemplifies this, as its margin profile is among the widest of any company.
V Gross Profit Margin data by YCharts. TTM = trailing 12 months.
With Visa turning more than half of every dollar it takes into pure profit, it's one of the most efficient businesses around. This also allows Visa to produce a lot of cash, which it uses to pay a dividend and repurchase shares.
Visa pays only a modest dividend, with the company recently raising its payout to $0.52 per quarter. That works out to about a 0.8% yield, far from a best-in-class dividend. However, this 0.8% yield is better than nothing and adds to its long-term return potential.
Visa mostly uses its cash to repurchase shares. In fiscal 2023 (ended Sept. 30), Visa spent $12.1 billion on repurchases versus $3.75 billion on dividends. This has been a long-term strategy for Visa, as it has drastically reduced its share count during the past decade.
| Time Frame | Shares Outstanding Reduction |
|---|---|
| 1 year | (2.4%) |
| 5 year | (7.8%) |
| 10 year | (18.4%) |
Data source: YCharts.
This plan will continue for Visa, as the board just authorized a new, multiyear $25 billion repurchase program. Both dividends and repurchases help boost Visa's long-term return potential, but is it enough for the company to cross the $1 trillion threshold?
Visa can easily become a trillion-dollar company
From today's prices, Visa's stock would have to rise almost 90% or have a compounded annual growth rate of roughly 9.8%. Over long periods, stock price rises are highly correlated to earnings growth. So, assuming Visa needs to increase its earnings by essentially 10% each year is reasonable. The dividend provides about a 0.8% yield, which knocks the required return down to 9%.
If Visa can also repurchase about 2.4% of it shares (as it did in 2023), that will provide an automatic 2.46% earnings boost, even if net income doesn't increase that year. That would reduce the required earnings growth to about 6.5%.
In FY 2023, Visa's net income rose 15% to $17.3 billion. So, if Visa maintains this growth rate, it will not just meet this required rate of return -- it will crush it. Visa expects to increase its earnings per share in the high-teen percentages in FY 2024, so it's on track to continue this growth rate. Meanwhile, the average Wall Street analyst expects Visa's revenue to rise by about 13.9% annually during the next five years.
Visa will clearly be a $1 trillion market-cap company by 2030 as long as these projections hold. Additionally, based on growth forecasts, it should provide market-crushing returns, making it a top stock to buy now. Furthermore, Visa is trading below its decade-long average price-to-earnings (P/E) valuation.
V PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
Visa has been an incredible investment during the past decade, and all future indications point to another great one to come.
