Visa Inc. is a giant in the payment processing world, handling over 60% of U.S. debit transactions and generating billions in revenue through data processing and merchant services. But is Visa stock worth adding to your portfolio today? In this post, we’ll walk through our four-step valuation process to determine if Visa is a good investment opportunity.
1. What’s in the News?
Recently, Visa faced an antitrust lawsuit from the Department of Justice (DOJ), which argues that Visa holds a monopoly position in the U.S. debit card market. According to the DOJ, Visa’s dominance—processing more than 60% of U.S. debit card transactions and earning over $7 billion from these transactions—warrants scrutiny. The DOJ claims that Visa’s practices, such as incentivizing exclusive contracts with merchants, have limited competition.
While the lawsuit led to a dip in Visa’s stock price, many investors question the merits of the case. Given Visa’s size and global reach, it’s challenging for competitors to gain market share, but that doesn’t necessarily make Visa a monopoly. Mastercard and other processors continue to actively compete in this space, and Visa’s success may simply reflect the strong network effect that underpins its business model.
2. Company Fundamentals
Visa’s core business focuses on providing payment processing solutions for consumers and merchants worldwide, including credit and debit card transactions. In recent years, Visa has also begun expanding into B2B and peer-to-peer transactions, strengthening its position in the digital payments ecosystem.
We use six indicators to check whether a company’s fundamentals are solid and healthy.
| Item (Avg. 5 years) | Value | Check mark |
| Revenue growth | 9.53% | ✅ |
| Net income growth | 17.13% | ✅ |
| Free cash flow growth | 14.97% | ✅ |
| Share buy back | 1.9% | ✅ |
| Long-term debt/fcf | 0.87 | ✅ |
| Dividend growth | 15.52% | ✅ |
3. Key Ratios and Metrics
Visa’s margins and ratios underscore its dominance:
- Gross Margins: 76%
- Operating Margins: 66%
- Return on Invested Capital (ROIC): 30%
Visa’s gross margins demonstrate strong pricing power, allowing it to capture and retain value in the payments market. The high ROIC suggests Visa’s business is well-positioned to generate value for shareholders in the long term.
Visa also enjoys a low selling, general, and administrative (SG&A) expense ratio, currently below 10%. This efficiency is primarily due to Visa’s strong brand presence and the “network effect,” where merchants are incentivized to accept Visa payments simply because it’s a ubiquitous choice for consumers.
4. Valuation
To feed our formulas, we agreed on the following metrics:
| Item | Input |
| Projection period | 15 years |
| Discount rate | 10% |
| Estimated growth rate | 12.6% |
| Projected P/E ratio | 35 |
| Required rate of return | 11% |
| Margin of safety | 10% |
1. Projection Period
- Reason: The projection period spans 15, allowing for a thorough assessment of the company’s future financial performance. This duration captures multiple business cycles and provides a reasonable estimate of growth based on historical data and current market conditions. For Visa, a longer projection period (e.g., 10 years) may be warranted due to its established market presence and stable revenue streams.
2. Discount Rate
- Reason: The discount rate reflects the risk associated with the investment and the opportunity cost of capital. For Visa, a commonly used discount rate might range from 8% to 12%, considering factors like the risk-free rate (e.g., U.S. Treasury yield), the equity risk premium, and Visa’s beta (volatility relative to the market). Given Visa’s strong financial position and established business model, a discount rate closer to the lower end of this range could be justified.
3. Estimated Growth Rate
- Reason: The estimated growth rate for Visa’s revenues and earnings can be derived from historical growth trends and market analysis. Analysts might project a conservative growth rate of around 10% to 15% per year. This rate reflects continued growth potential in digital payments, new market opportunities, and expansion into B2B and international markets.
4. Projected P/E Ratio
- Reason: The projected price-to-earnings (P/E) ratio is often based on historical averages and future growth expectations. For Visa, considering its dominant market position and high margins, a projected P/E ratio of 25 to 30 may be reasonable. This aligns with industry benchmarks and reflects investor expectations of continued earnings growth.
5. Required Rate of Return
- Reason: The required rate of return accounts for the risk associated with holding the stock and the expected return based on the company’s historical performance and future prospects. For Visa, this might be set between 10% and 15%, reflecting the company’s stability, competitive advantages, and the broader economic environment. A higher required return could be applied due to potential regulatory risks, such as the ongoing antitrust lawsuit.
6. Margin of Safety
- Reason: The margin of safety provides a cushion against uncertainties and reflects the investor’s risk tolerance. A margin of safety of around 15% to 25% is often recommended for growth stocks like Visa. This accounts for potential miscalculations in the financial model or unforeseen market changes, ensuring that investors can still achieve satisfactory returns even if the company’s performance doesn’t meet expectations.
Conclusion
Given the input above, our tool returns a fair value around $237,75 with a buy in price of $213,97 accounting for margin of safety of 10%. However, if you were to remove some of the outliers the company value will be getting closer to the current stock price. Given Visa’s size some investors might even want to engage in this stock at a small premium. However, remember to always do your due diligence before acquiring a stock in any given company.