Global Tap-to-Pay Expansion And Partnerships Will Strengthen Market Position

Key Takeaways

• Visa's expansion in tap-to-pay technology and partnerships with global banks and institutions boosts transaction volumes and revenue growth.
  
• Development of value-added services, co-brand cards, and fraud prevention tools supports revenue expansion and improves net margins.
  
• Intensifying competition, regulatory changes, and economic factors could pressure Visa's market share, revenue growth, and earnings, with potential currency and partnership risks.

Catalysts

Operates as a payment technology company in the United States and internationally.

• Visa's expansion of tap-to-pay technology, particularly in markets like Japan, Argentina, and the U.S., is increasing transaction volumes and driving digital payment usage, which will contribute to higher revenue growth.
  
• The partnership and deal renewals with major banks and financial institutions worldwide, including ICICI Bank, HSBC, and ICBC, are expected to increase cross-border and affluent market volume, potentially enhancing revenue and earnings.
  
• The growth in Visa Direct, especially in cross-border transactions, along with partnerships like X Money, is projected to significantly increase transaction volume and transaction-related revenue.
  
• Visa's development of value-added services and fraud prevention tools, such as Visa Protect for account-to-account payments and the acquisition of Featurespace, is likely to support revenue expansion and improve net margins by providing high-value solutions beyond traditional payment processing.
  
• Visa's ongoing strategy to convert transactions from domestic networks to Visa and launch co-brand cards will expand market share and drive higher payments volume, leading to increased revenue and potentially improved net margins.

Visa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Visa's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 53.5% today to 55.1% in 3 years time.
• Analysts expect earnings to reach $27.3 billion (and earnings per share of $14.8) by about March 2028, up from $19.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.7x on those 2028 earnings, down from 33.9x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 2.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Visa Future Earnings Per Share Growth

Risks

• Increasing competition from domestic networks and alternative payment systems could challenge Visa's market share, potentially impacting its revenue growth and net margins.
  
• Macroeconomic factors, such as the muted economic environment in the Asia Pacific region, may hinder growth in these markets and affect overall revenue and earnings.
  
• Regulatory changes, such as those mentioned with Reg II, could create downward pressure on transaction costs and fees, impacting Visa's net margins and earnings.
  
• Fluctuations in exchange rates, such as the strength of the U.S. dollar, might reduce inbound travel and cross-border spending, thereby impacting international transaction revenue and overall profit.
  
• Potential risks associated with Visa's reliance on partnerships and renewals may affect its revenue and margins if such collaborations do not yield expected outcomes or if pricing concessions weigh heavily on financial results.

Valuation

• The analysts have a consensus price target of $373.812 for Visa based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $410.0, and the most bearish reporting a price target of just $289.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $49.6 billion, earnings will come to $27.3 billion, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $341.48, the analyst price target of $373.81 is 8.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.