Visa: Get to Know the Three-Pillar Growth Trajectory of (NYSE:V)

Visa (NYSE:V) is the centerpiece of many high-quality investor portfolios, featuring one of the most resilient, consistent and highly profitable growth stories of the 2000s.

Although Visa is commonly perceived as a flawless investment that beats the market, this was not the case for the last five years. In fact, Visa is behind the market by nearly 20 points.

As I expect 2025 to mark a turning point for the company, this is the perfect time to recap Visa’s 5-year underperformance to explain why I see the same reasons for underperformance as the drivers of its future trajectory to beat the market and to emphasize the three-pillar growth story.

Introduction

I started covering Visa here on Seeking Alpha last April. In a series of articles, I’ve gone through Visa’s complex business model and its growth trajectory. We also published quarterly updates in competition with Mastercard (MA) and explained why I prefer Visa as an investment.

While Visa has performed well since we initiated coverage, it has underperformed the market by about 10 percentage points, albeit with much less volatility.

In this article, I thought it would be valuable to do something a little different, zoom out a bit and look at the longer-term opportunity.

But first, we should take a brief look at the past.

Let’s dive in.

Putting five years of underperformance into context

Past performance is not an indicator of future results. Although it’s a phrase often quoted in the investment world, I think it turns out to be incorrect in many cases.

Just as you would generally expect a winning athlete to keep winning and a losing athlete to keep losing, I think the same is true for both investors and companies.

For every investment of mine, whether it has a history of outperforming or underperforming, I ask myself this simple question – “What is in its future that may lead to a different outcome in the future?”

Of course, if it has a history of beating the market, I don’t want anything to change. If not, I have to clearly explain to myself like a three-year-old – “That’s why X led to poor performance and why it won’t in the future.”

I’m sure many of you have come across this chart on social media or the financial news landscape recently:

It probably came with a statement that said something like, “I didn’t have underperforming Visa on American Express (AXP) on my dashboard.” Well, even if it’s counterintuitive, it’s true.

Importantly, Visa has a strong performance over a longer time frame:

However, there’s no denying that Visa has fallen behind over the past five years. And to stay true to my process, we need to look at the reasons for poor performance.

Reasons for Visa’s poor performance

Visa is primarily a consumer payments company. This is what made the company the empire it is today. Cynics might argue that Visa was in the right place at the right time to move towards digitizing payments worldwide, but in reality, Visa and its nemesis Mastercard should get much of the credit.

The two payment giants have led and accelerated the adoption of digital payments, which has enabled the development of entirely new industries such as e-commerce, reducing fraud and improving global GDP.

All this is the basis of what I am going to say now – this extremely profitable secular trend had to reach a deceleration at some point.

As digital payments become the norm, cash-to-card tailwinds are diminishing. They are very far from reaching saturation, but also very far from maximum growth.

Both Visa and Mastercard achieved high valuations at the end of calendar 2019, reflecting yet another huge growth:

At a multiple of almost 40 times, the market ensured a future that could not materialize. Then came the pandemic, which, combined with stimulus, ZIRP and post-Covid consumer mania, drove growth rates very high, very quickly, but also led to a sharp deceleration afterwards.

Overall, Visa’s underperformance is almost entirely a multiple-contraction story, as its five-year EPS CAGR of 12.5% ​​significantly outperformed the stock at 10%. In particular, Visa’s EPS and revenue growth during this period is much higher than the market.

In addition to the slowdown in consumer payments growth that drove the contraction, a significant portion of Visa’s growth in recent years is derived from new lines of business in Value-Added Services and New Flows.

They are still relatively new and the market is not willing to pay the historical consumer premiums (30x-35x) for them.

So this is why Visa underperformed. Let’s move on to the next question.

What might lead to a different outcome in the future? Visa’s three pillars of growth

Leaving aside today’s much more “exciting” valuation compared to five years ago, which we’ll discuss in the next section, Visa has three primary growth pillars that I think the market still doesn’t fully understand.

Old consumer payments

Consumer payments are no longer the ocean space they were two decades ago. Today, there is a clear distinction between developed markets such as the US or the UK, where digital payments have a very high penetration, and emerging or developing markets such as Indonesia and Latin America, where there is still much more room for basic digitization.

In developed markets, Visa estimates there is still a $20 billion volume opportunity, which comes primarily from transactions that are still done in cash and check. The US accounts for 25% of this number. To drive the migration of these more stubborn segments, Visa is working on convenience (eg tap to pay and tokenization) and customized solutions for traditional non-card categories such as rent, large purchases or utilities.

In developing and emerging markets, it is the same historical playbook. Working to educate consumers and retailers about the benefits of digitization, working with regulators, increasing adoption and more. An example is Japan, which is still a big cash country, where regulators have set targets to reduce the use of cash.

Spin it any way you want, consumer payments is still a single-digit growth story and remains one of the best businesses in the world.

Value added services

I have described the Value Added Services (VAS) segment in my previous article. Just to briefly remind everyone, it has five divisions in issuance, underwriting, risk, consulting and marketing, and open banking.

What they all have in common is that they leverage Visa’s existing capabilities, know-how and relationships to cross-sell and add value to customers.

VAS is approaching a $9 billion run rate, growing comfortably into the twenties. This is also one line of business where Visa beats Mastercard, which is a big factor in my preference for the former.

This is essentially a fintech manufacturing machine, as the CFO describes it:

Why value-added services are so strategically important to us is, A, when we do a good job of delivering value to our customers through innovative products and services, it really deepens and strengthens customer engagements and helps them to grow and protect their businesses.

And B, it’s a great pipeline for innovation. So it’s our pipeline of innovation, new products, new services. It allows us to reach a new addressable TAM. It also gives us the opportunity to expand geographically in a much wider way. And when we do both of these things right, we ensure that Visa remains the best way to pay and get paid.

— Chris Suh, CFO, Goldman Sachs Communacopia 2024

I expect this segment to continue to grow from teenagers into their twenties. Today, it represents 25% of total revenues and as it grows in size, so will its consolidated growth profile.

New streams

Similar to VAS, this is also a relatively new line of business. Here, Visa is taking advantage of new payment verticals, primarily in the commercial space. Things like accounts payable, accounts receivable, purchases, insurance, and more.

Visa sees these verticals as places where there is still a lot of manual work and real pain points. I remember when I was in charge of inventory at a bar I worked for, we had to file everything in a binder and the owners would go sit with the accountant at the end of each month to file each invoice.

This is a space that Visa wants to disrupt, just as it has done for consumers.

After some non-recurring hiccups in Q4 ’23 and Q1 ’24, New Flows has returned to mid-teens growth, where I expect it to remain for the foreseeable future.

ASSESSMENT

The assessment question for Visa is quite easy and simple.

Given Visa’s tremendous free cash flow margins, high-quality business model, strong competitive advantages and long-term growth prospects, I believe Visa should trade at around 2.5x PEG, in line with peers high quality.

With an EPS growth trajectory of ~12%, that brings us to a P/E of 30x, about 15% higher than the current 26x FY multiple.

Importantly, Visa’s fiscal year starts in September, which means the 26 times multiple you see above is slightly higher than the calendar 2025 multiple, which is 25 times.

Conclusion

Visa has underperformed the market over the past five years as it transitions from a fast-growing consumer payments company to a diversified three-legged business.

New segments in Value Added Services and New Flows should accelerate growth and showcase Visa’s advantages over competitors including Mastercard.

Over time, the market will learn to appreciate these new categories and push Visa back to its historic prime.

I expect Visa to outperform the market over the next five years and reiterate a ‘Buy’ rating.