At some point, it might not be such a remarkable feat for a company to earn a trillion-dollar valuation. Today, just five U.S. companies clear that hurdle, including Apple, Microsoft, Amazon, Alphabet, and Nvidia.
These technology stocks may soon be joined by payments company Visa (V -0.23%), which could be the first company in the financial sector to join the club. Only halfway there, its record of steady growth seemingly has the stock on a journey to a trillion-dollar market cap.
I'll show you what makes Visa so special, and why investors can still buy today and enjoy market-beating returns on the stock's way to the trillion-dollar club.
A leader in a rapidly growing industry
What separates trillion-dollar companies from others is their ability to generate such enormous profits. Most companies struggle to grow once they get to a certain size. However, dominant companies in trillion-dollar industries can grow longer than most.
The global economy has slowly but steadily shifted from cash to noncash payment methods like debit and credit cards, and in recent years, newer methods like digital wallets. According to research by Capgemini, the global number of noncash payments was around 1.3 trillion in 2023 and could grow to 2.3 trillion by 2027. Based on this tally, Visa, which processed 266 billion transactions in 2023, would have a 20% global market share.
The significant growth still ahead for noncash payments gives Visa a long and durable growth runway. The payments business is highly competitive, but Visa is a leader, and the market opportunity is growing fast enough that many companies can benefit.
Visa is doing it like few others can
A picture can say a lot. The chart below sums up how Visa stock has outpaced the S&P 500 index by a nearly 2-to-1 ratio for the past decade. First, Visa has maintained double-digit revenue growth, averaging 11% annually. As a payment network, it's a toll-booth business model, charging a fee for every network transaction.
Next, the company is very profitable, turning 57% of that revenue into free cash flow, which management has used to pay a dividend and repurchase its stock. That supports earnings growth because Visa's profits are spread across fewer shares. More revenue, more cash flow, more repurchases. It's a simple but powerful recipe that few businesses can pull off.
V Revenue (TTM) data by YCharts
There are growing companies, and there are very profitable companies. But doing both at Visa's level? That makes it an exceptional business.
Getting Visa to the trillion-dollar club
Today, at a $550 billion market cap, Visa is over halfway to becoming a trillion-dollar company. A stock's valuation comes from its earnings and what the market will pay for them. Sometimes, stocks get so expensive that they can stagnate for years while the underlying business grows and catches up to the stock.
It doesn't look like that's likely for Visa and its shareholders. Yes, the stock trades at a forward P/E ratio of 28, and analysts have lowered their long-term growth forecast over the past year as consumers struggle (household debt is at all-time highs).
However, without a recession tanking consumer spending, low-double-digit earnings growth seems doable because Visa has consistently grown revenue at a low-double-digit rate, and its share repurchases help drive earnings per share (EPS) upward.
Its PEG ratio is hovering around 2, making the stock a tad expensive for its estimated earnings growth. However, I wouldn't split hairs with high-quality companies like Visa. Remember, growth estimates were 3 percentage points higher not even a year ago, so it may not be worth waiting for some perfect entry point that never comes.
V EPS LT Growth Estimates data by YCharts
Visa can hit a trillion-dollar market cap from here by doubling its EPS and the stock maintaining its current valuation. Visa essentially has to keep doing what it's been doing for years. Using analysts' 13% earnings growth rate, Visa's EPS would double within six years. Again, that could come sooner or later than six years, but given Visa's record of consistency, I don't think that time frame is too far off the mark.
Since the S&P 500 returns a historical average of 9% to 10% annually, Visa is poised to become a trillion-dollar stock and continue its market-beating ways. It's a solid choice for any buy-and-hold investor.
