There's been some positive news lately that inflation is still slowing, leading to renewed optimism about the economy and calming fears of a recession. The S&P 500 is up more than 16% this year as investors grow more optimistic, though we're still in a bear market.
Credit card network Visa (V +0.61%) benefits when spending is high, but it's doing just fine right now despite macroeconomic uncertainty. It has soundly beaten the market in the past and created shareholder value. What can investors expect over the next five years?
More of the same
Visa usually runs like clockwork, and a change to a new chief executive officer in February didn't cause any waves. It's the largest credit card processing company in the world, and since it gets a fee with every card swipe, it enjoys huge and growing revenue.
Revenue increased 12% year over year in the 2023 fiscal third quarter (ended June 30), fueled by cross-border volume, which increased 17%. Total cards increased 7% over last year to more than 4.2 billion, which feeds into transaction and revenue growth.
More than that, it's an earnings monster. Earnings per share rose 25% in the third quarter to $2, and Visa has a wide profit margin, which increased to 52% in the third quarter. That means more than half of its revenue was turned into income, which is unusually high.
Visa's performance tends to mirrors the economy; when people spend, Visa benefits. Since the economy grows much more often than not, Visa does well much more often than not. However, it's still performing well right now despite the inflationary environment. Five years is too long to make any guesses about what will be happening to economic growth, but Visa is likely to benefit from a strengthening economy, and even if there are dips along the way, it probably will gain during a rebound.
But better
Any great company has to innovate to keep its dominance, and Visa is doing just that. When Chief Executive Officer Ryan McInerney laid out the company's growth plans, they mostly amounted to doing everything it's already doing, but better. Specifically, it's going to do better marketing, speed up shipping, and sell more effectively.
McInerney mentioned three growth levers: consumer payments, new flows, and value-added services. Consumer payments are the Visa payments you think of when you pay using a credit card, new flows are new payment types, and value-added services are the extra services Visa offers merchants and clients to enhance their businesses.
Visa is expanding its market share as clients are attracted to its strong brand and advanced services. In its capacity as the largest company of its kind, it's able to use its vast resources to upgrade its technology and services, including acquiring smaller businesses with complementary tools, and it's not easy for any competitors to match it. And since Visa is a global company, we're talking everyone from Hyundai Motor in Korea to Intesa Sanpaolo in Croatia, Hungary, Romania, Slovakia, and Slovenia, both of which recently signed new deals with Visa. That's not to mention its home business in the U.S. with hundreds of affiliated U.S. banks, credit unions, and merchants.
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Key Data Points
It recently announced that it's acquiring processing platform Pismo, which supports its network and gives it more capabilities and flexibility as it broadens its services.
These are important because they bolster the new flows and value-added services businesses, which are growing faster than the overall company -- they increased 20% year over year in the third quarter. This protects Visa's business as more fintechs spring up and companies need more digital financial features to support the increase in digital payments and online banking. It also widens Visa's competitive moat and sets it up for continued success.
As Visa inks new deals, captures greater market share, and widens its influence, it becomes less susceptible to specific economic headwinds.
In five years, Visa is likely to have kept its top spot and created more shareholder wealth. Visa stock beat the market over the past five years, and it's likely to do it again over the next five.
