Visa

Following particularly strong fiscal second-quarter results, Visa came back down to earth in its fiscal third quarter but continued to see strong growth.

Why it matters: Net revenue grew 13% year over year on a constant currency basis, down from 16% in the previous quarter, but in line with management's full-year guidance. Payment volume growth ticked up a bit sequentially to 10% on a constant-currency basis, with an uptick in domestic growth as the main driver. However, growth in July appears to have returned to the previous quarter's level. All in all, though, consumer spending continues to hold up well, creating a good glide path for Visa. Constant-currency cross-border volume, excluding intra-Europe transactions (which are priced similarly to domestic transactions), grew 12% year over year during the quarter, up from 11% in the past few quarters. Stronger online commerce volumes were the main driver, and the headwinds in travel spending that Visa had previously seen due to the situation in Iran were offset by the World Cup.

The bottom line: We will maintain our $330 fair value estimate for the wide-moat company and see shares as modestly overvalued. Adjusted operating margins (based on net revenue) declined to 66.7% from 67.5% last year. While Visa has seen strong growth this fiscal, this has been matched by increased investments in personnel and marketing. Management's guidance suggests flat margins over the full year. On the positive side, value-added services continues to be a bright spot, with this area seeing 34% year-over-year growth in the quarter. While we appreciate the momentum we're seeing in this side of the business, some of this growth appears to be driven by marketing revenue related to the World Cup, and we're skeptical this level of growth can be maintained.

We are increasing our fair value estimate to $330 per share from $323 due mainly to time value since our last update, but we have also made some modest adjustments to our assumptions. Our fair value estimate equates to 24.4 times our adjusted projected fiscal 2026 earnings.

While growth had been muted in the beginning of the pandemic, particularly due to the impact on cross-border transactions, more recent growth has been above the company's historical experience as volume bounced back. Starting in fiscal 2024 and continuing through fiscal 2025, we saw growth start to normalize back to a level in line with prepandemic growth, and we think that, barring any significant change in consumer spending, the company will maintain a stable level of growth in the near term. We think the ongoing shift toward electronic payments will allow Visa to maintain strong growth rates over the next five years. We project gross and net revenue to grow at 11% and 10% compound annual rates, respectively, over the projection period. We think that growth will be increasingly driven by international markets as emerging markets become a more meaningful engine for the business.

While margins on a gross revenue basis have stalled in recent years and had been under pressure through the pandemic, the scalability of the business and the bounceback in more lucrative cross-border transactions has aided margins more recently, although this has been partially offset by an increase in client incentives. We project operating margin (based on gross revenue) to hold at about 48% through fiscal 2029. On a net revenue basis, we expect margin to improve at an average annual rate of about 50 basis points. Given the company’s history of fines and one-time charges, we include ongoing one-time costs roughly in line with historical averages in our projections, but these costs are excluded from the margin levels above.

We use a 8.5% weighted average cost of capital in our valuation.

Leading payment networks such as Visa benefit, unsurprisingly, from a network effect. The more consumers that are plugged into a payment network, the more attractive that payment network becomes for merchants, which in turn makes the network more convenient for consumers, and so on. This explains why a small number of networks have come to dominate electronic payments. At this point, Visa has reached essentially universal acceptance in most developed markets. While the network effect is the initial and primary driver of economic moats in this industry, the highly scalable nature of payment processing leads to sizable cost advantages for large payment networks, which further cements their competitive positions. For the dominant payment networks with global footprints, such as Visa, the network effect and resulting cost advantage are strong enough to lead to a wide moat, in our view.

Visa traces its roots to the issuance of the first Bank of America cards in the late 1950s. As credit cards grew, partnerships between credit card issuers became necessary, and Visa as a brand was formed in 1976. In the decades since, Visa has been one of the largest beneficiaries of the shift toward electronic payments. In fiscal 2025, the company processed over $14 trillion in purchase transactions. Visa has about 14,500 financial institution partners and over 50 million merchants accepting Visa. According to the Nilson Report, Visa holds over 50% market share (by purchase volume) in the US, Europe, Latin America, and the Middle East/Africa. Visa also processes roughly twice as many transactions as its closest competitor, Mastercard. Simply put, Visa’s position in the world of electronic payments is unparalleled. We don’t believe that building a new network with a comparable size and reach is realistic over any foreseeable timeline, and we view Visa’s position in the current global electronic payment infrastructure as essentially unassailable.

Visa has translated its dominant competitive position into an enviable level of profitability. Operating margin (using net revenue) in fiscal 2025 was 66%, and margins have generally trended upward because of the scalability of the business. Further, given the relatively asset-light nature of the business, returns on invested capital are quite healthy, averaging 40% over the past five years and 81% if goodwill and other intangibles are excluded.

Visa has commanding market share in a scalable industry.

There is still a long growth runway for electronic payments, which surpassed cash payments on a global basis only a few years ago.

The scalable nature of the business should allow Visa to improve its already impressive margins.

Visa’s leading market share creates more opportunities for loss than gain.

The oligopolistic nature of the industry makes Visa and Mastercard targets for regulators and lawsuits, and the companies have paid some large fines.

UnionPay provides an example of how governments could favor local networks; this could shut Visa out of some emerging-market opportunities.