Regulation and Market Maturity Will Limit Earnings Growth Potential

Key Takeaways

• Well-positioned to benefit from the continued growth of digital payments and the international market
• Investing heavily in B2B and cross border payments for new revenue growth
• Has a wide moat, and a large serviceable market, but investor expectations are already high
• Additionally the Credit Card Competition Act could be a major negative catalyst
• Risks to my narrative include stronger than expected US consumer, and increased use of Visa network from future Fintech.

Catalysts

The Benefits of Visa’s Global Reach

Visa processes more than $11.6 trillion in gross dollar volume (GDV), made up primarily of digital payments with the remainder being things like ATM withdrawals, B2B transactions, etc. Alongside Mastercard, which is en-route to process $9.2 trillion, this makes Visa one of the two largest payment processors in the world. The company evidently has a wide moat that is targeted by competitors and regulators.

Simply Wall St: Visa’s historical revenue and earnings

While many competitors such as Block (SQ) and Paypal (PYPL) seek to penetrate the high-margin space, Visa is well-positioned to benefit from the continued growth of digital payments and serve as a foundation for digital transactions with a wide moat that can be difficult to substitute. 

Digital payments, a core part of Visa’s transaction value, are estimated (2) to reach a $9.5 trillion GDV in 2023, and grow to $12 trillion in 2025. 

The Credit Card Competition Act May Be A Major Negative Catalyst

Acknowledging that the passing of this act is not a given, investors may see a large portion of the profits of payment processors like Visa wiped out should this law pass. In its current proposition, the legislation would enable merchants to choose an alternative payment processor (one that isn’t Visa or Mastercard) to execute payments for their customers. 

Merchants instead of customers are the ones covering payment processing fees, so they have a large incentive to route payments to the cheapest competitor. Inevitably, Visa will be forced to lower their payment fees to compete with these cheaper alternatives, thereby compromising a key income stream. 

Large companies like Walmart and Amazon will especially benefit from this change as they stand to reduce the fees paid to processors like Visa and Mastercard.

I estimate that this bill or a compromised version of it will pass, and erode Visa’s oligopolistic moat, and therefore their margins and net profits.

Visa Will Only Capture 30% of Serviceable Addressable Market

In 2021, the US value of non-cash payments was estimated to be over $128.51 trillion 

I estimate a Total Addressable Market (TAM) of $100 trillion to $150 trillion, based off data from the US plus the rest of the world.

 But I think that a more realistic Serviceable Addressable Market (SAM - What Visa’s share of the TAM could be) for Visa is between $50 trillion and $75 trillion.

Alternative data: Global acquiring volume estimates (gross dollar value - GDV) for key peers

Alternative data estimates indicate that the global SAM for card networks will grow to $60 trillion in 2027. Of the SAM midpoint of $62.5 trillion by 2028, I estimate that Visa manages to capture 30% resulting in a GDV of $18.75 trillion.

Visa had a take rate of about 0.2247% for the last 9 months, up 9.4% YoY from 0.2054%. Assuming Visa captures my estimated GDV of $18.75 trillion, the revenue in 2028 comes up to $42.2 billion (5.8% CAGR revenue growth)

As most of the developed world already prefers cards, Visa will find it more difficult to open up international markets, so I expect the company to reach this high-point. 

The International Segment Is A Primary Revenue & Growth Driver

Much of Visa’s growth comes from international markets, and there are two key verticals to watch for the company: e-commerce and B2B cross-border payments.

Simply Wall St: Visa’s revenue breakdown by segments

E-commerce is growing rapidly, and Visa is the leading payment processor for online transactions, making it well-positioned to capture this growing market. 

Visa is also expanding into business-to-business (B2B) payments and cross-border payments. These markets have a lot of potential, and Visa is investing heavily to capitalize on these opportunities.

Assumptions

Revenue growth to slow slightly from 9.7% to 9% p.a.

• I expect revenues to grow at a 9% CAGR in the next five years, reaching $48.28 billion, due to the already high market share and difficulty in growing in emerging markets. For context, Visa’s 5-Year revenue CAGR is 9.7%, which I consider an upper limit given the already captured market share.

Regulatory and Competitive Headwinds to Pressure Margins

• I view negative regulatory and competitive headwinds pressuring profit margins, resulting in a stabilized margin of 50% in five years. This yields earnings of $24.14 billion.

Buybacks To Accelerate

• The company has reduced its share count by 2.2% on average in the last 2 years, and I expect that trend to accelerate to 2.5% p.a. by 2028, given that Visa has a combined payout ratio of dividends and buybacks of 85%. This results in a reduced share count to 1.8 billion.

Valuation Multiple to Re-rate Lower

• A high PE is indicative of growth, and I think that investors' sentiment will decline once they start viewing Visa as a maturing company. For this reason, I think Visa will re-rate to a lower PE of 22.2x in 2028.

Risks

Economic Resilience on US Consumer

• The U.S. consumer may prove more resilient than anticipated, and Visa may continue riding the growth wave in international markets, offsetting economic slumps.

Fintech Developers Use Visa Network More Than Expected

• Fintech companies are developing innovative payment solutions. However the Web-3 industry has been underwhelming in its attempt to replace traditional payment processors. Future FinTech developers may opt to use Visa’s infrastructure instead of trying to disrupt the widely established company.