Everyone is searching for the next trillion-dollar stock. Visa (V -0.98%) could be it. That's because it benefits from a powerful competitive advantage that few other companies can match. This competitive advantage has fueled Visa's historic rise, and it won't be going away anytime soon.
What exactly makes Visa so special? It's all about network effects.
Network effects put stocks on steroids
If you want to find growth stocks that can keep growing faster and longer than anyone expects, look for companies that benefit from network effects.
In a nutshell, network effects are when a product or service gets more valuable as more people use it. Social media companies like Meta Platforms are a great example. No one wants to use a social media platform with only a few people on it. Instead, users almost always flock to platforms that already have a broad user base. Even if another company develops a better platform than Instagram or Facebook, one with more functionality and an easier user interface, it likely won't amount to much because Facebook and Instagram have already reached critical mass when it comes to network effects. They have the people, so they control the market.
As Meta has proven, network effects can provide a reliable runway for growth. Growth, in many ways, begets more growth. Both Facebook and Instagram grow stronger the larger they get, attracting even more users while preventing competing platforms from catching up. Network effects simply put growth stocks like Meta on steroids. That's great news for Visa considering that it benefits from some of the strongest network effects of any publicly traded company today.
Visa is the perfect network effect stock
You're likely familiar with Visa as a company. You may have a Visa credit or debit card within arm's reach right now. Why? Because you know it will be accepted by almost every merchant you're likely to patronize. Merchants, meanwhile, want to accept the forms of payment that most people prefer to use.
These factors in combination create natural consolidation. Just four payment networks control nearly the entire U.S. credit and debit card market: Visa, Mastercard, American Express, and Discover. According to a study by Statista, Visa has a 61% market share going by value of transactions, easily making it the heavyweight. Mastercard comes in second with 25%, American Express third with 11%, and Discover is a distant fourth with only a 2% market share.
As you can see, market share drops off quickly after Visa. And given an understanding of network effects, this makes total sense. It would be very difficult to start a new payments network that could rival Visa's. Somehow, that new competitor would need to convince millions of merchants to accept its form of payment even though no one currently uses it. Or, that company would need to convince millions of people to adopt their form of payment even though no merchants currently accept it.
To be sure, there are competitors that have grown beyond their initial niches to work their way into the global payments space. PayPal, through its namesake app as well as Venmo, and Block, through its Cash App, allow person-to-person money transfers without using an incumbent payment network like Visa's. In 2023, $993 billion was transferred via peer-to-peer apps like Venmo and Cash App. Yet Visa's vast network is still too powerful to sidestep entirely. On April 1, Visa announced that both PayPal and Venmo would begin using Visa+, an interoperability network the company created to bridge various peer-to-peer payment services. Other payment services like Current and Western Union will also be integrating Visa+. When it comes to payment networks, bigger is better, and the fact that smaller competitors are allying with Visa instead of just fighting it is another sign of Visa's durable competitive advantages.
Visa's strong market power is readily obvious in its profitability. Over the last decade, Visa has generated an average profit margin of 47%. That's higher than Amazon or Alphabet, the parent company of Google. It's even higher than Meta Platforms. Life is easy when you have an asset-light business with a dominant market share and minimal competition.
META Profit Margin data by YCharts.
Will Visa be a trillion-dollar stock by 2035?
Visa has a terrific long-term track record, not because it has a super-innovative business model or a special patent, but because it benefits from strong and durable network effects. These are exactly the types of businesses you want to own long term.
It's not hard to see Visa surpassing a $1 trillion market cap well before 2035. It took only a few years for the company to grow from a $250 billion valuation to a $500 billion valuation. The payments industry is truly gigantic, and with a hefty lead on the competition, Visa should have no problem growing from its $560 billion market cap today to a $1 trillion market cap by 2035. In truth, it should surpass that mark by 2030. All it needs to do is sustain its current growth rates, and durable network effects make that a reasonable expectation.
Visa stock can look expensive. Shares, for example, are now priced at 31 times earnings. But keep in mind that the S&P 500 as a whole currently trades at 28 times earnings. Paying a bit extra for one of the market's highest-quality businesses shouldn't faze investors willing to hold the stock over the long term.
