In the last 10 years, shares of Visa (V -0.23%) have climbed 377%. This performance is stellar, no doubt, and it exceeds what an investor would have achieved by putting money into an S&P 500 index fund.
As of this writing, this credit card giant carries a market cap of $530 billion. But can it become a $1 trillion stock by the end of the decade?
Here's what investors need to know about the probability of Visa basically doubling in value over the next roughly seven years.
Visa is a dominant enterprise
Contrary to what many people might think, Visa doesn't approve or originate credit card loans. This is the responsibility of banks like Capital One or Bank of America, to name just two. These companies take on the financial risk of lending capital via an unsecured product.
On the other hand, Visa really just provides the technological infrastructure that allows all parties involved in a card transaction to communicate with each other, collecting a tiny, high-margin fee in doing so. It seems like an unimportant task, but Visa is essential to the smooth functioning of our economy.
Imagine for a moment if Visa's network were to experience a disruption and stop working. Consumers wouldn't be able to shop. And businesses wouldn't be able to pay vendors. It would be a nightmare.
This reality underscores how critical Visa is to all stakeholders. And it helps exemplify how the company's competitive position is almost entirely protected from disruption.
Some astute readers might point to the threat of fintech businesses, like PayPal and Block, that might derail Visa. But these two payments-focused enterprises actually help accelerate adoption of digital payment methods by improving upon the user experience. PayPal's wallet supports Visa-branded cards. And Block's Cash Card is a debit card that uses the Visa network.
This puts Visa in a very advantageous position to continue reaping the rewards of a global economy that is only becoming more and more digitized. As cashless transactions proliferate, this company is set to continue posting healthy growth rates.
Visa hitting $1 trillion is a likely scenario
Visa currently sports a price-to-earnings ratio of 31.9. This seems expensive at first glance, but the multiple represents a slight discount to the stock's trailing-10-year average of 33.7. That's an encouraging sign.
Assuming this valuation ratio stays the same and the outstanding share count doesn't change, the company would need to generate diluted earnings per share (EPS) of $15.60 in 2030 for the business to reach a $1 trillion market cap. This translates to a compound annual growth rate of under 10% over the next seven fiscal years (2023 to 2030).
How likely is this to happen? Well, based on the factors noted, Visa's competitive position remains strong, and the business is in no immediate danger of disruption. Plus, it possesses a robust financial profile and benefits from the broad secular shift to cashless transactions. These are enough reasons to be optimistic.
But to hammer home the argument that this will in fact be a trillion-dollar company by 2030, consider that in the last decade, Visa's diluted EPS increased at an annualized clip of 15.9%. In other words, investors can expect the bottom-line gains to slow down meaningfully going forward, which is a conservative assumption, and the business would still reach the trillion-dollar mark.
Therefore, it looks like a high-probability bet that Visa will make it into this exclusive valuation club at the end of the current decade.
