Regulation and Market Maturity Will Limit Earnings Growth Potential

Visa Posts Another Solid Quarter, Expects To Continue Growth

• Visa grew 10% in the last 12 months, slightly above my estimates.
• The company is facing a DOJ lawsuit because of its large market share and allegations of pressuring competitors.
• TTM net income grew 14% to 19.7B. With a 55% margin, Visa has shown resilience and is above my profitability estimate.
• I’m extending my 9.1% revenue CAGR and 50% net margin estimates to 2029.
• Despite trading at a premium, I think that Visa has the ability to grow into its fundamentals in the next few years.

Visa reported a Q4’24 net revenue growth of 12% to $9.6B YoY. The annual growth was $35.9B, slightly above my estimated 9% annual CAGR, and well underway to my 2028 target estimate of $48.3B. I will be extending my growth estimate to 2029, leading to an updated revenue target of $52.65B.

The key drivers for fiscal year growth were cross-border transactions, up by 15%, and payments volume, up by 8%.

Management issued guidance expecting high single, to low-double-digit revenue growth for FY’25, with incentives and cross-border payments being the key drivers. 

Operating expenses are expected to track revenue growth, indicating that the company will maintain current levels of efficiency, despite wide AI adoption as noted in the earnings call.

Quarterly and FY net income rose 14% to $5.3B and $19.7B respectively. This is higher than my estimated $18.4B as Visa has shown resilience on their brand and pricing power. 

My target margin of 50% is lower than Visa’s current 55% net margin, and I estimate that competition and regulation will slowly pressure the company’s margins in the next five years. I am maintaining my 5-year net profit margin estimate, which results in $26.3B for 2029.

In FY 2024, the company returned $16.6B via buybacks, and $4.22B in dividends, marking a total of $20.82B in returns to investors. Net of $850M in stock-based compensation, this represents a 3.7% adjusted yield. This indicates that despite growth, Visa’s is also generating a sizable cash return for investors.

DOJ Targets Visa On Antitrust 

On September the 24th, the Department Of Justice (DOJ) filed an antitrust lawsuit against Visa. On the earnings call, Visa reiterated that they will fight the allegations. However, management’s tone on call resembled a willingness to work with the government. In my view, the payments landscape is clearly dominated by Visa and Mastercard, however this position is mostly earned, and there are plenty of well-funded competitors in the space. In this regard, I suspect there will be no clear case against Visa, and regardless of the election outcome, I suspect that the next administration will not have the political capital or willingness to keep pushing campaigns against large companies.

Valuation Update

Management’s guidance and the performance thus far is fairly consistent with my forward estimates. I expect this to continue in the next 5-years, which is why I am maintaining and extending my forward estimates to 2029. 

Using my 22x PE and $27.8B earnings in 2029, I estimate Visa’s forward value to be around $611B. Discounted back using a 6.9% rate, I get a present value of $438B or $243 per share.

Relative to my narrative, it seems that the company continues to be traded at a premium, slightly below the 5-year forward value. Given Visa’s stable performance and continued growth expectations, investors may be able to justify the premium if the same assumptions hold in the future.