Digital payments provider Visa (V) is one of the global leaders in an ever-growing space, generating $22 billion in annual revenue. Visa shares have returned about 1,400% to early shareholders since 2008, and today, shares trade with a market capitalization of $436 billion, making it one of the largest stocks in the US.

Due to this success, as well as the company’s long runway for additional growth, Visa is a very popular holding among institutional investors and hedge funds, such as Valley Forge Capital Management. However, Visa shares have had an excellent run in recent years, propelling the valuation to levels that are significantly above the stock's historical averages.

This article will discuss Visa's business model, recent earnings, and future growth catalysts.

Business Overview

Visa has produced incredible growth in recent years because it was a very early adopter to what has become a mega-trend in payments; the ability to make cashless, quick payments in stores or on the internet. Visa’s network has seen widespread adoption among consumers and businesses, and it generates high-margin fees every time a payment is made on its network, which is thousands of times every second. Visa operates as a toll booth to the world of commerce and it has proven very lucrative.

The company reported third quarter earnings on July 28^th, with results coming in weak against the year-ago period. Visa’s third quarter aligns with the second quarter on the calendar, which was the weakest portion of the year as a result of COVID-19. Visa’s results showed Payments volume declining 10%, Processed Transactions declining 13%, and a 37% fall in Cross-Border Volume.

This led to earnings-per-share declining on an adjusted basis by 23% to $1.06. Unlike many companies, Visa is continuing to buy back its own shares and pay its dividend during this very challenging period. The company withdrew guidance for this year, but we expect $5.00 in earnings-per-share for 2020 following Q3 results.

Growth Prospects

One thing Visa has never lacked is growth potential. The company’s earnings-per-share rose by more than seven times in the decade ending 2019, for annualized growth of 22%. We aren’t quite that bullish on Visa’s growth potential looking forward, however, as the scale the company has achieved means further gains will be harder to come by.

Still, Visa is a major beneficiary of the transition to a society that is less dependent upon cash, and there are many developing economies around the world that don’t yet have access to cashless options. This means that Visa can not only continue to grow in the developing world through higher transaction volumes, but it should have an extended growth runway internationally as well.

In total, we expect Visa to deliver long-term earnings-per-share growth of 14% annually over the next five years, making it one of the fastest-growing stocks in our coverage universe.

Valuation and Total Returns

While we are quite bullish on Visa’s growth prospects, we are also cognizant of the fact that this growth appears to be largely priced into the stock at this point. Shares trade for nearly 41 times our earnings estimate of $5.00 per share for this year, which is almost double our estimate of fair value at 22 times earnings. That means Visa is extremely overvalued, and we see the valuation as causing a headwind to annualized returns of 11.5%.

The yield is just 0.6% with the current payout of $1.20 per share, and combined with earnings-per-share growth of 14%, we project Visa will return just 1.7% to shareholders annually through 2025.

Final Thoughts

Visa has certainly been a huge beneficiary of the mega-trend towards cashless payments, and has a very long runway for growth both domestically and internationally. However, that growth appears to be largely priced in at this point, and we recommend investors wait for a meaningful pullback that brings shares closer to our estimate of fair value. Because of this, we do not rate Visa as a buy, instead recommending investors wait for a better price before buying shares.