In the past five years, the S&P 500 has produced a total return of 108% (as of Aug. 22), which would have more than doubled an investor's starting capital.
Visa (V 3.28%), despite being a phenomenal business, has generated a total return of only 54% during that same period of time.
Where will this financial stock be in five years?
Continuing to thrive
Throughout its history, Visa has benefited from the prevalence of cashless transactions. Consumers and merchants both appreciate the convenience and security of using cards, and there's no reason to believe this trend is going to end anytime soon.
In the U.S., a highly developed economy, more than half of Americans still use cash for some of their purchases in a typical week. This percentage is sure to decline in the years ahead, but there's a long way to go. In emerging markets, like Latin America or Africa, the runway is even larger.
For Visa, this presents a wonderful opportunity to keep increasing revenue at a steady pace. In the past five years, sales have climbed at an annualized pace of 8.9%. I see no reason why growth in the years ahead won't be similar.
That will result in more profits being generated. Visa raked in $4.7 billion of free cash flow (FCF) in third-quarter 2024 (ended June 30), representing a jaw-dropping 53% of revenue.
NYSE: V
Key Data Points
Visa's competitive position
No one can predict the future, which makes it difficult to figure out how a business will be performing five years down the line. One way that investors can protect the downside is by trying to understand a company's competitive position.
In this instance, is Visa still going to be flourishing toward the end of the decade? Or will it start to experience some disruption?
There's no question that this is one of the best businesses in the world. I already discussed the secular trend that'll continue propelling payment volume and revenue, as well as Visa's huge level of FCF profitability.
But investors can't ignore the company's economic moat, which stems from its network effects. There are billions of Visa cards being used around the world that are accepted at more than 130 million merchant locations. Each stakeholder finds more value in the network because it's so ubiquitous.
Visa is so ingrained in the fabric of our society that it's almost impossible to envision a smoothly functioning economy where its platform didn't exist. This is all the convincing an investor needs when determining the quality of the business.
Valuation and growth
Visa shares currently trade at a price-to-earnings (P/E) ratio of 28.6. That represents a discount to its trailing five-year average valuation multiple of 35. Plus, it's about as cheap as the stock has gotten in the past three years. This is encouraging for prospective investors looking to put money to work.
The business is projected to grow adjusted earnings per share (EPS) at a compounded annual rate of 12.7% between 2023 and 2026, according to consensus estimates. Given that Visa's adjusted EPS climbed at 13.7% per year on average in the five years before, I believe Wall Street's estimates are in the right ballpark.
To be clear, though, Visa's shares don't look like a bargain by any stretch of the imagination, at least when compared to the overall S&P 500. However, given this company's powerful position in the payments space, coupled with the high probability that EPS will keep rising at a double-digit annualized rate, it makes sense to consider buying shares right now.
The stock could do well in the next five years. But the verdict is still out on whether or not Visa can outperform the broader S&P 500, which it has failed to do in the past five years.
