Visa: There's Lots Of Growth For The Future

About: Visa Inc. (V)
by: Kurt Pollet

Visa is a company that is efficiently run and has a solid history of growth.

The company is focused on organic growth and is actively seeking out new partnerships to boost future growth.

Visa is leveraged to E-commerce which is a rapidly expanding market segment.


Visa Inc. (V) is an American based financial services company providing credit card payment facilitates around the globe. The company is efficiently run and has shown strong growth over the years with more growth expected in the future.

Management is proactive and emphasizes organic growth to further boost its future growth. Visa directly benefits from the growing E-commerce market.

Visa has the potential to provide growth well into the future. While its stock price is a little expensive, most good growth stocks are expensive as investors are willing to pay for proven growth. In my opinion Visa would make a sound investment with capital gains potential over the long term.


Visa has reported financial results for the first quarter ending December 2018 (data from Seeking Alphaand Yahoo). Note: Visa’s financial year starts in October.

The company’s revenue was up 13 percent and its earnings were up 21 percent from the same quarter last year. Over the last five years Visa’s revenue has grown 13 percent per year and its earnings have increased by 19 percent per year.

The return on equity is very good at 32 percent. Over the last decade the return on equity has broadly worked its way higher from around 10 percent ten years ago.

The profit margin (profit to revenue ratio) is very high at 51 percent. The profit margin over the last ten years typically ranged from 21 to 46 percent. The profit margins from the last five quarters ranged from 40 to 51.

Visa’s working capital is adequate with its current assets exceeding its current liabilities (giving a current ratio of 1.5). The company has a history of operating with a satisfactory amount of working capital. Over the last ten years its current ratio has ranged from 1.5 to 2.5 on its annual balance sheets.

The debt ratio (liabilities to tangible assets) is 1.3 which means that the value of Visa’s tangible assets does not cover its liabilities (tangible assets are hard physical assets that can be sold in the event of liquidation). However, Visa’s total assets do cover its liabilities with a total debt ratio of 2.0. Visa’s carries a lot of intangibles and goodwill on its balance sheet (which represents 59 percent of its total asset value).

The company’s book value is currently around $13 and with a stock price of $141 Visa is trading at 11x book value.

The analysts’ consensus forecasts are for revenue to increase 11 percent in 2019 and 2020. Earnings are forecast to increase 24 percent in 2019 and increase 16 percent in 2020. The 2019 PE ratio is 26x and the 2020 PE ratio is 23x.

Visa has a solid history of growth and its return on equity tripled over the last decade. The company has become very efficient at utilizing its assets to generate profits. Visa’s book value appears high as the company has a relatively low asset base for the profits it makes. Visa’s efficiency is also apparent in its profit margin (which has increased to an impressive 51 percent).

Visa manages to operate with such high efficiency levels largely because its business model. As the company is in the credit business it does not need to spend a lot on plant and equipment or research and development. But nevertheless Visa has managed to increase its operating efficiency to an impressive level.

Business Model

Visa provides authorization, clearing, and settlement of payment transactions around the globe. The company’s credit cards serve both consumers and businesses.

In Visa’s latest Earnings Call, management stated that they remained confident that their business performance would continue over the medium to long term. To me this says that management is confident that its impressive historical performance will be replicated into the future.

As a means of driving future growth management stated that E-commerce continues to grow three times faster than non e-commerce. E-commerce drove approximately one-third of consumer spending.

Personally I think that the trend in E-commerce will continue well into the future and is a logical fit for credit card companies. The younger generation is fast becoming very computer literate and technologically savvy. This generation will use all sorts of devices (such as cell phones) to make their purchases (rather than cash) and will slowly replace the older generation (who like to use cash) as the years go by. This will certainly secure Visa’s future growth.

Visa stated in their earnings call that their performance is fueled by partnerships, whether it'd be their traditional financial institutions, FinTechs, commercial players, new payment flow partnerships or their sponsorship partners.

Visa’s management is actively seeking out new markets and forming new partnerships to serve their credit card facility.

In Australia, Visa formed a partnership with three banks within the Westpac Group and will be the exclusive provider for credit card services. This is a smart move as it effectively eliminates the competition here.

In China, Visa executed a three year deal with Lakala is one of China's leading integrated financial services platform. This will provide 7 million merchant locations. Expanding into china is a good more as this market has enormous future growth potential as the country continues to modernize with a huge population of consumers.

In Japan, Visa has formed a co-brand deal with LINE (which is one of Asia's leading messaging platform and social networks). This makes perfect sense as Japan is especially a technological consumer oriented country which makes it a perfect fit for Visa’s expansion plans for E-commerce.

During the last quarter Visa has been active in renewing existing contracts around the globe. Visa signed a five year renewal with BBVA Bancomer in Mexico and renewed deals with SBI card and ICICI (two of India’s largest credit issuers).

I like the way Visa is focused on organic growth by forming all sorts of partnerships and alliances. But Visa has also made several acquisitions in recent history with 8 acquisitions since 2010. Their latest proposed acquisition is the global financial organization Earthport Plc which Visa plans to buy for £198 million. Considering that Visa has a market cap of around $300 billion (USD) this gives an idea of the shear size and magnitude of Visa.

Visa is not only a global magnate but it also has a powerful brand name that is recognizable by pretty much anybody old enough to understand the concept of spending money.

While Visa certainly has competition, I don’t think that they will have any real affect on Visa’s future growth trajectory. Globally Mastercard is Visa’s main competition and American Express is mostly active in the United States (in Australia, American Express is hardly used). Also, the smaller credit card companies don’t pose any threat to Visa’s future earnings. Due to Visa’s strong brand name, consumers will likely use the trusted well known Visa card as opposed to some unknown credit facility.

Stock Valuation

The PEG (PE divided by the earnings growth rate) is an appropriate method for valuing a growth. Historically, since 2014 Visa’s revenue has increased 13 percent per year and its earnings increasing 19 percent per year which confirms that Visa is a growing company.

The forward annual earnings growth using forecast data is 16 percent for 2020. This is slightly less than the historical earnings growth of 19 percent per year.

Using the slightly lower 2020 expected earnings growth of 16 percent leads to a slightly more conservative valuation. This gives a forward PEG of 1.4 with a 2020 PE of 23x.

A forward PEG of 1.5 means that Visa is overvalued with a current stock price of $141. It is commonly accepted that a stock is fairly valued when its forward PEG is 1.0 which gives Visa a fair value stock price of around $99.

Visa’s forward PE is 23x and its book value is 11x which makes the current stock price a little expensive, however Visa is a solid growth stock with long term growth potential. While the stock may seem expensive, investors are happy to pay for stocks with future growth potential – due to Visa’s strong brand name.

Stock Price Target

As an active investor I personally like to determine some likely price targets. This gives me a feel for how high the stock price could go in the short term and how soon it could get there.

Visa ten year stock chart

Visa chart by

The stock chart for Visa shows a fantastic run up in price over the last decade. The stock price pulled back from its 2018 high along with the broader market indices before showing a short rally for this year (which also corresponds with the rally seen so far this year from the broader market indices).

Visa will probably only trade to new highs if the market trades to new highs. If the market does trade to new highs I would expect the stock to make new highs. The $35 gain seen in 2018 (which is the $150 high less the $115 at the start of the year) could easily be replicated in 2019.

The $35 rally added to the $124 low of the current pullback would give a target of $159 which could be reached in 12 months.

Stock Price Risks

The broader market poses a risk to Visa’s stock price. The market indices have been trending upwards with a bull market that began in 2009. These market indices have currently pulled back from their highs with a short rally so far this year. It’s always possible that this is the start a bear market with the current market rally being nothing more than a bear rally.

If the current market rally fails and a bear market forms then I would expect Visa’s stock price to fall irrespective of its earnings growth (as Visa is a stock leveraged to consumer spending).

While in the short term the stock price might fall, over the longer term I would expect Visa’s stock price to work its way higher in line with its future growth potential.


Visa has shown strong growth over the years and I would expect more growth heading into the future. The company is efficiently run and management is actively seeking out new ways to further boost its future growth.

The stock is a little expensive but the company has the potential to provide growth well into the future. Most good growth stocks are expensive as investors are willing to pay more for companies with a proven growth track record.

In my opinion Visa would make a sound long term investment, but in the short term the stock price could temporarily decline if the market turns bearish.

Disclosure: I am/we are long V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.