Where will Visa be in 5 years?

In the last five years, S&P 500 produced a total return of 108% (as of August 22), which would have more than doubled an investor’s seed capital.

Visa (V -0.19%)despite being a phenomenal business, it only generated a total return of 54% over the same time period.

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 alike appreciate the convenience and security of using cards, and there’s no reason to believe this trend will end anytime soon.

In the US, a highly developed economy, more than half of Americans still use cash for some of their purchases in a typical week. This percentage will surely decrease in the coming years, but there is still a long way to go. In emerging markets, such as Latin America or Africa, the track is even bigger.

For Visa, this is a great opportunity to continue to grow revenue at a steady pace. Over the past five years, sales have grown at an annual rate of 8.9%. I see no reason why growth in future years will not be similar.

This will result in generating more profits. Visa took in $4.7 billion free cash flow (FCF) in the third quarter of 2024 (ended June 30), representing a staggering 53% of revenue.

Visa’s competitive position

No one can predict the future, which makes it difficult to figure out how a business will perform five years down the road. One way investors can hedge against downside is by trying to understand a company’s competitive position.

If so, will Visa continue to flourish towards the end of the decade? Or will it start to suffer some disruptions?

There is no doubt that this is one of the best businesses in the world. We’ve already discussed the secular trend that will continue to propel Visa’s payment volume and revenue, as well as its huge level of FCF profitability.

But investors can’t ignore the company’s economic moat stemming from it network effects. There are billions of Visa cards in use worldwide, which are accepted at more than 130 million merchant locations. Every stakeholder finds more value in the network because it is so ubiquitous.

Visa is so ingrained in the fabric of our society that it is nearly impossible to imagine a smoothly functioning economy where its platform did not exist. This is all the conviction an investor needs when determining the quality of the business.

Evaluation and growth

Visa shares are currently trading at a price-to-earnings (P/E) ratio of 28.6. That’s a discount from its five-year average valuation multiple of 35. Plus, it’s as cheap as the stock has gotten over the past three years. This is encouraging for potential investors looking to put money to work.

The business is expected to grow adjusted earnings per share (EPS) at a compound annual rate of 12.7% between 2023 and 2026, according to consensus estimates. Given that Visa’s adjusted EPS has grown 13.7% per year on average over the previous five years, I think Wall Street’s estimates are on point.

To be clear, though, Visa stock doesn’t look like a bargain, at least compared to the overall S&P 500. However, given this company’s strong position in the payments space, along with the strong likelihood that EPS will continue to grow at a double-digit annualized rate, it makes sense to consider buying shares right now.

The stock could do well for the next five years. But the verdict is still out on whether or not Visa can outperform the S&P 500, which it has failed to do over the past five years.