Visa Inc. (V): A Bull Case Theory

We came across a bullish thesis on Visa Inc. (V) on Johnson Equity Analysis’ Substack by Kyler Johnson. In this article we will summarize the bulls’ thesis on V. Visa Inc. (V) share was trading at $291.56 as of Sept 17th.

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Visa is a global leader in payment processing, generating $32.7 billion in 2023 by charging small fees for each card transaction. With a robust market share in the U.S., Visa dominates the debit and credit card space with 61.1% of the market, up from 53% in 2007. Worldwide, Visa holds 16.14% of cards in circulation, a figure projected to grow to 16.8% by 2028. The company’s growth is driven by the shift from cash to card payments and rising global consumption. The industry is expected to expand by 8.95% annually, reflecting ongoing trends favoring digital transactions.

Visa’s financial performance is impressive, boasting a median free cash flow (FCF) margin of 44.2% over the past 20 years, compared to competitors’ median of 28.37%. While Visa has a stellar return on equity, averaging 37.38% over the last five years, it has focused heavily on share buybacks and dividends, which may not be the best use of capital. By retaining more of its FCF, Visa could have significantly boosted its book value and long-term growth prospects. Instead, management’s incentive structure, tied to earnings per share (EPS) and total returns, has driven a short-term focus on buybacks. Despite this, Visa’s strong cash generation and efficient use of capital continue to deliver growth, albeit at a slower rate than possible.

Visa’s balance sheet remains robust, with $16.6 billion in cash reserves and $19 billion in FCF over the past year, more than enough to cover its $20 billion in debt. This capital-light business also requires minimal maintenance, with only $1 billion in capital expenditures. The company’s conservative use of leverage reduces the risk of financial distress during downturns.

While Visa’s management hasn’t always been transparent about its capital allocation decisions, the company’s strengths outweigh its shortcomings. Visa enjoys a massive market share, impressive cash margins, and an entrenched competitive advantage due to its wide network of merchants and users. Even with some missed opportunities for reinvestment, Visa remains a dominant player with strong future growth prospects, particularly in international markets. Looking ahead, Visa is expected to grow revenue at 8% annually, driving the stock price to an estimated $602 by 2034, offering an 8.6% compound annual growth rate (CAGR) from current levels.

Visa Inc. is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 163 hedge fund portfolios held V at the end of the second quarter which was 166 in the previous quarter. While we acknowledge the risk and potential of V as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than V but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.