Visa Stock Deep Dive | Best Quality Stock Idea Q1 2026 w/ Clay Finck (TIP791)
Summary
Visa Investment Case: Positioned as a global toll collector on commerce with powerful network effects, high margins, low capex, and consistent double-digit EPS growth potential.
Mastercard Comparison: A rational duopoly with Visa; slightly smaller but often more aggressive in new flows, both benefiting from secular cash-to-digital tailwinds.
American Express: Closed-loop model targeting affluent consumers, higher merchant fees, strong brand and recurring fee/interest economics; expected to perform alongside broader digital payments growth.
Growth Drivers: Digital payments penetration, cross border transactions (higher take rate), value-added services expansion, and emerging markets adoption propel revenue and EPS.
AI and Agentic Commerce: Visa is positioning its rails as the trust layer for machine-to-machine/agentic payments, extending its moat into AI-driven commerce.
Risks & Regulation: Key risks include regulatory scrutiny, interchange litigation, and proliferation of local A2A schemes; Visa counters with scale, compliance, and value-added security services.
Financial Profile & Capital Returns: 80% gross and ~60% operating margins, robust free cash flow funding substantial buybacks; valuation fair-to-rich with returns tied to sustained EPS compounding.
Interactive Brokers Note: Cited as another high-margin, capital-efficient compounder with long runway for account growth in the U.S. and internationally.
Transcript
(00:00) With each debit or credit card swipe all around the world, they collect a small fee for helping facilitate digital transactions. Visa's mission is to connect the world through the most innovative, reliable, and secure payment network, enabling individuals, businesses, and economies to thrive. (00:21) Digital payments is something that I feel like we all sort of take for granted because it's something that has just become so central to all of our lives. And because it's something that's so ingrained in our daily life, it's easy to overlook its importance and the potential opportunity that awaits for investors. (00:39) Over the years, we've seen this shift globally to electronic payments. And this has been a very positive tailwind for Visa. Before [music] we dive into the video, if you've been enjoying the show, be sure to click the subscribe button below so you never miss an episode. It's a free and easy way to support us and we'd really appreciate it. Thank you so much. (01:03) Hey everybody, welcome back to the Investors Podcast. I'm your host KlayFink and today we'll be doing a deep dive on Visa. I've been interested in investing since I was 18 years old. And over the years, I've become more and more interested in individual stocks. As one manages their portfolio, you gradually learn, not just from reading, but from making mistakes and learning some of the most important investing lessons the hard way. (01:30) One lesson I've picked up is to take note of what some of the best investors in the world are doing. Now, that's not to say that you should just copy what the best of the best are doing, but maybe at least take note of it. Back in January 2023, my co-host Stig Broers and I were going back and forth on Alphabet. (01:48) The business fundamentals looked great and the valuation looked compelling. And one of the things that Stig brought to my attention was that Leelu from Himalaya Capital was adding significantly to his position in Alphabet. Now, Leelu is without a doubt one of the great investors of our time. So, this is something worth considering when buying a company like Alphabet. (02:13) Not only does Leelu look for limited downside when running such a concentrated portfolio, he's also looking for the potential for asymmetric upside as well. And the bet on Alphabet has played out quite well for him. But this isn't a bulletproof way to find ideas. For example, many people followed Charlie Munger into his Alibaba trade, and that case proved to not be a great bet, at least so far. (02:32) So, you might be wondering, what does this have to do with Visa? Well, the first thing I would mention is that several of the great investors of our time have major investments in Visa already. Many listeners have been asking me to bring Dev Kasaria back onto the show as a guest. (02:51) Consaria's firm, Valley Forge Capital Management, they have over $4 billion in AUM and according to their most recent 13F, over 7% of assets are invested in Visa and around 20% is invested in their competitor, Mastercard. Czech Ore's firm has a stake in Visa that's worth over $1 billion or 10% of their portfolio. Terry Smith, who my co-host William Green featured on the podcast last year, he has around a 6% position in Visa. (03:18) And most notably, Chris Hone from TCI Fund Management has an 18% position in Visa. And given that he manages north of $50 billion, this makes his Visa position worth over 9.5 billion. Hoen is an investor worth following because he's showcased compounded annual returns of more than 18% peranom for more than two decades. (03:42) That's around 9 percentage points better than the overall market. Furthermore, Hone added to his position in Q2 and Q3 of 2025. So, with shares of Visa today trading at around $330 per share, Hone was likely buying shares in the 330 to 350 range just a few months back, potentially making Visa an interesting buy at today's prices. (04:07) On the topic of network effects, Hone stated, "We found other barriers to entry, such as network effects. Payments is one. We've been a shareholder of Visa a long time where it has this huge ever-growing network connecting every customer in every bank to the world and as this network grows it becomes ever harder to replicate. End quote. (04:29) So when analyzing companies I think it can be helpful to revisit what exactly the best of the best investors look for when investing in companies. Dev Concessaria has been kind enough to share his investment approach here on the show so we can potentially get a glimpse into some of the things that he's seeing when he's looking at Visa since he currently owns a position in the company as of the time of recording. (04:49) One of the first things that Kasaria looks for in a business is predictability. If he can't predict where a business is likely to be in 10 years, then he's probably not interested in owning that company regardless of the potential for growth that lies ahead. (05:08) So he would rather sacrifice growth to ensure that he isn't likely to lose money over the next decade. In my interview with Kesaria, he stated, "We define quality as finding the perfect intersection between growth and predictability. You could have companies that are growing very fast, like a young software company, but you're not sure of where it's going to be 5 or 10 years in terms of the market share or industry dynamics. Or you can find a company that's extremely predictable. (05:33) We're trying to build a portfolio that on a weighted average basis can grow in the high teens to low 20s over the next decade, but can do so in a very predictable way. End quote. Another thing he looks for is a dominant business with pricing power, preferably companies that are in a monopoly or duopoly position. And as we'll discuss, I believe that Visa does have a pretty dominant position in the market. (05:58) Lastly, Constasaria wants to purchase businesses that are capital light, meaning that they don't require massive R&D expenses or capital expenditures. He wants businesses that print cash that can then be distributed to shareholders through buybacks rather than making a splashy acquisition. (06:17) He doesn't want to risk buying a business that prints a lot of cash and then decides to use that cash in a risky manner that ends up getting them into trouble. That's one reason why many big tech companies don't fit as well into Kisaria's framework. While big tech companies like Alphabet and Meta generate enormous cash flows, they reinvest heavily in R&D and data centers and infrastructure simply to maintain their competitive position, which also makes the future of these businesses less predictable. In in businesses like Meta and Alphabet, capital spending is not optional, but it's actually a (06:51) requirement to stay relevant, which reduces the durability and predictability of free cash flow over very long time periods. That dynamic also increases the temptation for large transformative acquisitions or ambitious internal projects that can introduce significant capital allocation risk. Before we get into where Visa sits today, it's important to understand how the company came to be. (07:16) The story of Visa began in 1958 with a bold and almost reckless experiment by Bank of America. They mailed 60,000 live credit cards to unsuspecting residents in Fresno, California, in an attempt to jumpstart a payment network out of thin air. This was the birth of the Bank America card, the very first consumer credit card with a revolving credit feature. (07:40) While mailing unsolicited credit cards is illegal today, this was the creation of a new financial ecosystem and it was the very first time that revolving credit started to become widespread. Usually when a consumer took on some amount of credit in a purchase, they had to be paid up by a certain date. (07:59) But with revolving credit, which is how credit cards work today, essentially you're able to keep a balance and acrue interest. So, the launch of the Bank America card was really the first time that consumers had access to this. As the program's popularity exploded, Bank of America began licensing their system to other banks across the US. (08:22) And by 1970, the network had grown so complex that it separated from Bank of America to form National Bank Americard, Inc. This transition turned the network into a cooperative owned by many banks that issued the cards. Now, the shared ownership model was crucial as it allowed the network to scale rapidly without being controlled by a single bank. (08:43) In the early 1970s, Bank Americard automated much of the process that needed to happen in a transaction, such as the authorization and interchange, and this made it significantly easier and more efficient to make transactions. As a result, transactions could be processed at any time. (09:04) Authorization times dropped from 5 minutes to 50 seconds, and banks cleared and settled transactions overnight instead of taking a week or more. To conquer the global market, the company underwent a major transformation in 1976 by rebranding as Visa. The name was chosen because it's simple, memorable, and sounds exactly the same in every language, signaling their ambition for universal acceptance. (09:25) Now, at this time, let's assume that we're a bank that works with merchants and you want merchants to start accepting credit cards from tourists. I'm sure many people in the US travel to London, so we can use that as an example. So, let's assume that the banks work with merchants in London. In order for a transaction to take place, the banks in London, they need to have a way of communicating with each of the tourist banks so that the transaction can be approved and money can be transferred. That means that software (09:56) needs to be developed that is integrated with every single one of the tourist banks and every single one of the merchants point of sale systems. There also needs to be support for hundreds of languages and currencies and compliance with thousands of local laws and regulations. (10:16) And the entire process needs to be automated, fast, and operate with zero failure or downtime. This whole complicated process is what Visa managed to put together. The most significant turning point in Visa's modern history that arrived in 2008 when the company transitioned from a private bank-owned cooperative to a public company. Its IPO was one of the largest in history, raising $19. (10:40) 1 billion, reflecting the massive value of its global network. Since then, Visa has continued to expand, acquiring Visa Europe in 2016 to unify its operations into one global powerhouse. Today, it stands as the dominant toll booth on global commerce, facilitating trillions of dollars in transactions every year. (11:02) So, Visa has recently been in the headlines due to President Trump urging US lawmakers to pass legislation to limit credit card interest rates to 10%. In order to help Americans save on the amount of interest they're paying on credit cards, Ironically, Visa's stock was down 6% in the days after the announcement. But the irony is that credit card interest rates do not directly impact Visa's business because Visa doesn't lend money. (11:25) They don't set interest rates or they don't earn interest income. Visa earns fees based on transaction volume and payment processing. However, a hard cap on interest rates could indirectly affect Visa if it leads to banks tightening credit standards, reducing credit issuance, or lowering credit limits, which would reduce their transaction volume. (11:51) Credit card issuers might also pull back on rewards programs or marketing, slowing spending growth in credit cards relative to debit cards or alternative payment methods. In a more extreme scenario, some high-risk consumers could lose access to credit cards altogether, further pressuring volumes. So, while Visa isn't exposed to credit risk, regulatory changes affecting issuer economics can still ripple through to its growth outlook. (12:15) But with that said, I think it's pretty unlikely that a cap on interest rates would get passed as it would require congressional approval and would likely face strong opposition from banks, card issuers, and industry lobbyists. Even if legislation were introduced, it would almost certainly face significant legal and constitutional challenges, making implementation far from certain. (12:42) So, in my view, it's a classic example of the market acting irrationally based on investor sentiment. Even if the fundamentals haven't materially changed, the market can move stock prices in directions that just don't exactly make sense, bringing potential opportunities for us as value investors. So, diving in here to discuss Visa's business model, the easiest way to think of Visa is that together with Mastercard, it's a toll booth on the global economy. (13:08) With each debit or credit card swipe all around the world, they collect a small fee for helping facilitate digital transactions. Visa's mission is to connect the world through the most innovative, reliable, and secure payment network, enabling individuals, businesses, and economies to thrive. (13:30) Digital payments is something that I feel like we all sort of take for granted because it's something that has just become so central to all of our lives. And because it's something that's so ingrained in our daily life, it's easy to overlook its importance and the potential opportunity that awaits for investors. Over the years, we've seen this shift globally to electronic payments. (13:49) And this has been a very positive tailwind for Visa. Tying back to Hone's point about network effects, Visa is connected to more than 4 billion card holders, 150 million merchants worldwide, and nearly 14,500 financial institutions. By the looks of it, if anyone is interested in trying to disrupt Visa starting from scratch, that ship has just sailed. (14:12) It would be incredibly difficult to build the network that they have built and steal market share from them. But as I'll touch on at the end, there are a few potential threats and cases of competitors gaining a dominant position in different markets globally. (14:31) While today Visa is known for its logo on credit and debit cards, they do not actually extend credit or issue cards themselves. They leave it to the banks to issue the cards and take on the credit risk. Think of players like Chase, Capital 1 or Barclays. Visa on the other hand operates as the payment network that operates behind the scenes. (14:49) So we can think of them as the payment rails that facilitate transactions. If we think about all the payments happening all around the world every second of the day, Visa in addition to Mastercard are like an interstate highway system that collects a tiny toll fee for every car that drives on it. So to understand how Visa plays a role in the payments industry, let's walk through an example of what happens when you make a purchase. (15:15) So first I'll mention that there are five parties involved in every digital transaction. Let's say you walk into your local Chipotle, order your bowl with chicken and guac, and go to checkout, and you decide to use your Visa debit card that you got from JP Morgan Chase. So, you the listener would be the first party, which we can call the consumer. (15:40) You ordered your bowl at Chipotle in this example. So, we can call Chipotle the merchant. You then swiped your debit or credit card that was issued by JP Morgan Chase. That party we can call the issuing bank. And then we have Chipotle's bank which in this case we can just say is Cityroup in this example. And then lastly we have Visa. (16:00) Once the card is swiped, Visa is transmitting the data necessary between banks to ensure that you are good for the payment in a matter of less than a second. So Visa sits in the middle of this process of making digital transactions and they help ensure that this process is just entirely seamless. (16:19) The two banks involved in this example along with Visa are collecting a fee on each transaction and that fee tends to be around 2 to 3% in aggregate which is paid by the merchant and not paid by the consumer. One of the reasons that these payment rails are so deeply entrenched in our modern economy is that consumers get paid rewards for using these cards. (16:41) The card I use the most is actually an American Express card. I just love it because it pays a solid reward most of the times that I swipe it and use it. But I also have a Visa card in my wallet that I like to use as well. American Express is a bit of a different conversation, but they operate what we can refer to as a closed loop network. (17:02) Since American Express implemented this closed loop model, this led to their market share relative to Visa and Mastercard being much lower. But anyways, on many of these credit card transactions, the consumers are getting a reward for using that card, and that's ultimately paid by the merchant, but the merchant needs to have a payment method available that consumers are accustomed to using. (17:29) So, it's a bit of a chicken and an egg problem. the merchants don't necessarily want to pay 3% on every transaction they accept. But if they only accepted cash, that would likely lead to significantly less sales volume since people are so accustomed to using these cards and there just hasn't been a way for a new entrant to enter the market and take substantial share from Visa and Mastercard because of the rewards that keep customers coming back and using those cards. (17:58) So the network effect that these payment networks have are just substantial. So there's a very strong incentive for merchants to accept these cards and utilize Visa's network because the banks and Visa do the work of ensuring that the consumer is good for the payment. And in this process, Visa is going to earn around.1% or 2%. (18:22) So if we're looking at a $100 purchase, they're getting something like 13 cents, 15 cents. and it's a relatively small amount of the value captured. So, to put this in perspective, I like to get my gas at Costco. Let's say I spend $100 on gas there. My Visa card actually uh pays me 5% cash back on that purchase. So, I'm getting $5 in rewards. I'm not sure what the agreement is between Visa and Costco, but perhaps they're getting. (18:49) 1% in that agreement due to Costco's huge bargaining power. So out of the $100 spent, Visa would receive just 10 cents for helping facilitate the digital transaction. The main strength of Visa's business model is that network effect that they've built up over decades. (19:10) And for a new entrant to truly disrupt this network effect, they wouldn't just need a better app or a faster chip. They would have to convince tens of millions of merchants and thousands of financial institutions to abandon a system that already works perfectly. (19:29) Imagine that you built a new payment rail and you needed to start getting partners on board. If you walk into your local coffee shop and you told them all these reasons why your payment rail was better, they just wouldn't care to use it if no customers have the means of using that payment. And no customers are going to want to use it if merchants aren't going to accept it. So again, it's that chicken and egg problem. (19:54) Even the most well-funded fintech giants usually find it cheaper and easier to simply ride on top of Visa's rails rather than trying to create their own. So ultimately, Visa and Mastercard are the trusted networks, making the cost of switching away from their network prohibitively high for the entire global economy. (20:18) What's also really important is that Visa operates globally and they receive higher fees through crossborder transactions. So the last time I left the US was back in 2021 when I visited my co-host Stig Broers over in Denmark. I recall one evening I was going on a walk keeping an eye out on a spot I could grab dinner and I realized that my phone was about dead and I did not have any cash on me. (20:41) In times like this, when you're exploring a foreign city you don't know, well, Visa can sometimes feel like a savings grace. I ducked into a small cafe, ordered a sandwich and an iced tea, and I tapped my Visa card to pay without even thinking. I didn't need the local currency. (21:00) I didn't need to necessarily do the math on currency conversion, and I did not need to wonder if they accepted my Visa card. The transaction was approved in seconds. The receipt popped out instantly and I was back outside walking the Danish streets. But without Visa, I would have needed to use cash, which means hunting down an ATM, paying egregious fees, and hoping that I don't misjudge the amount of cash that I would need. (21:30) With Visa, the trust is already built in between me, the merchant, the bank, and a global network that's just quietly working for me in the background. And crossber transactions are actually quite an integral part of Visa's business. Because of the increased complexity, risk, and the currency exchange involved in crossber transactions, Visa is able to capture a higher fee than a domestic transaction. It tends to be around three times higher. (21:56) Despite crossber transactions making up just 10% of Visa's payment volume, they account for more than 1/3 of revenue. Are you looking to connect with highquality people in the value investing world? Beyond hosting this podcast, I also help run our tip mastermind community, a private group designed for serious investors. Inside, you'll meet vetted members who are entrepreneurs, private investors, and asset managers. (22:20) People who understand your journey and can help you grow. Each week, we host live calls where members share insights, strategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next stockpick, but also sharing lessons on how to live a good life. (22:40) We certainly do not have all the answers, but many members have likely faced similar challenges to yours. And our community does not just live online. Each year, we gather in Omaha and New York City, giving you the chance to build deeper, more meaningful relationships in person. One member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth and happiness. We're capping the group at 150 members. (23:06) And we're looking to fill just five spots this month. So, if this sounds interesting to you, you can learn more and sign up for the weight list at thevespodcast.com/mastermind. That's thespodcast.com/mastermind. or feel free to email me directly at claytheinvespodcast.com. If you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. (23:40) Each week, Shawn and Daniel do in-depth analysis on a company's business model and competitive advantages. And in real time, they build out the intrinsic value portfolio for you to follow along as they search for value in the market. So far, they've done analysis on great businesses like John Deere, Ulta Beauty, Autozone, and Airbnb. (23:58) And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It's rare to find a show that consistently publishes highquality, comprehensive deep dives that cover all of the aspects of a business from an investment perspective. Go follow the intrinsic value podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. (24:23) I mentioned a bit earlier that I do use an American Express card. So you might be thinking what prevents American Express from stealing share from Visa and Mastercard. The primary barrier for American Express is its closed loop model. (24:42) It requires the company to act as both the network and the bank, limiting its ability to partner with thousands of global financial institutions that work with Visa and Mastercard. And because Amxed, they historically charge higher merchant fees to fund their premium rewards. So many smaller or many international businesses just simply refuse to accept American Express in their stores. (25:05) While MX's rewards are pretty attractive, they're financed by these higher merchant costs. So, it's a strategy that works for luxury travel, but it struggles to compete with the lowcost, high volume utility model that Visa and Mastercard provide for everyday essentials. (25:24) Additionally, Visa and Mastercard's openloop system allows them to scale exponentially by letting banks like Chase or Bank of America, they're doing the heavy lifting in terms of the customer acquisition and the credit risk. Due to the business model that AMX selected, Visa and Mastercard own a lion share of the overall market. So, when we exclude China, Visa is estimated to have around 60% of the market. (25:50) Mastercard is estimated to be at around 25% and American Express is just over 10%. While MX lacks the universal reach of the others, it compensates by intentionally targeting affluent consumers who spend more and are worth significantly more per swipe to a merchant than the average consumer. (26:11) So, by positioning itself as a status-driven club rather than a basic utility, AMX creates a virtuous cycle where higher-end retailers are willing to pay those higher fees just to gain access to the deep pockets of the MX card holder. (26:30) And these retailers are certainly paying for more access to these types of customers as the fee they charge, it tends to be around.7% higher for in-person transactions. And much of this, of course, goes back to the consumer in the form of higher rewards. And when we look at the banks involved, they also have an incentive to work with players like Visa and Mastercard. So, one of Visa's most popular cards is JP Morgan's Chase Sapphire card. (26:54) JP Morgan Chase has an incentive to issue those cards and push a lot of payment volume through those because they will get these big financial incentives and rebates from Visa which is also just difficult to disrupt because Visa is operating on such a massive scale. In 2025, Visa facilitated over $16 trillion in volume. That's 16 with a T. (27:21) And you can of course see some competition between Visa and Mastercard attempting to steal these banking partnerships from each other, but in reality it just does not happen very frequently. Another segment that investors should be aware of is what Visa refers to as new flows. This segment is going to be less familiar to most people as it includes B2B payments, peer-to-peer transfers, and government dispersements. (27:53) Visa is building the tools to digitize and route those flows over its network and they are just beginning to tap into this market opportunity. So according to Visa, this segment addresses a $200 trillion market opportunity and currently Visa handles less than 1% of that volume. And then Visa's third business segment is its value added services which accounts for around 1/4th of their business. (28:18) The value added services suite of offerings. It goes beyond just basic payment processing. These services include things like real-time fraud detection, risk and security solutions, digital checkout tools, analytics, open banking capabilities, and advisory or consulting services. (28:41) This business is important because of Visa's global network, and the unique insights they have access to. With their massive database, they can provide insights on trillions of data points and transactions. In addition to helping diversify their business, this segment is also high margin and helps deepen their customer relationship with banks. (29:04) What's also really interesting to me about Visa is how some investors view Visa and Mastercard essentially as one and the same. This perspective stems from the fact that both companies seemingly operate these identical toll booth business models where they provide the underlying infrastructure for global payments, but they aren't taking the credit risk with the loans. (29:26) So, because they share the same secular tailwinds, investors often treat them as a singular bet on the growth of the global economy. So, I wanted to be sure to take some time to compare and contrast Visa and Mastercard to just better understand their differences. So, to compare these two giants, it's best to start with their global footprints and scale. (29:45) Visa is just the undisputed heavyweight. They're capturing around 60% of the market excluding China. Mastercard, as I mentioned, was at 25%. Geographically, Visa is more dominant in the US where it processes over double the volume of Mastercard. (30:06) However, Mastercard has historically maintained a slightly more balanced international presence, particularly in Europe, where the market share is closer to a 50/50 split. Despite these differences in scale, their business models are almost identical. Both operate these openloop payment networks that don't issue cards or don't take on the credit risk. (30:24) They both generate high margin revenue through transaction fees, crossber services, and an increasing focus on value added services like fraud detection. So, it's easy to view them just as a duopoly that grows in tandem with the global shift from cash to digital payments. So, from an investor's perspective, the choice between the two often comes down to a trade-off between Visa's sheer size and Mastercard's potential for slightly higher growth. (30:52) Visa's massive scale and high margins make it an incredibly durable cash flow machine. And meanwhile, Mastercard is often seen as being slightly more aggressive in pursuing the new flow segment and non-card payment technologies. (31:12) And because they share the same regulatory tailwinds and risks, many investors just simply choose to invest in both to capture the entire industry's growth. Historical shareholder returns align with this view as well. So since the start of 2017, shares of Mastercard grew at around 20% per year while Visa grew at around 16%. But it also depends on which time frame you're looking at because if you look at the returns since the start of 2022, shares of Visa have actually outperformed which also makes sense because Mastercard's valuation was a bit higher at that time at the start of the period. While Visa and Mastercard are fierce competitors in this payments (31:47) industry, they're viewed as what we can refer to as a rational duopoly. The two players prioritize maintaining high industry margins rather than engaging in these destructive price wars. So instead of cutting fees to steal market share from the other, this would just erode their margins that both companies certainly enjoy, they instead focus on expanding the total addressable market by converting the world's remaining 11 trillion in cash transactions to digital payments. This cooperation ensures that while they compete on innovation and (32:24) security, the underlying toll they collect remains stable. So it effectively is treating this global commerce as a shared infrastructure that rewards both players for its continued growth. One of the most impressive things about Visa's business is just its financial profile. Gross margins are 80%, operating margins are 60%. (32:51) And [clears throat] when you look at large cap publicly traded companies, that is just some of the best margins you're going to find. One company I can think of that has an even better margin profile than Visa is the company I covered last quarter on episode 768. That company is Interactive Brokers. So in fiscal year 2025, Visa generated around 40 billion in revenue. (33:15) Around three4s of that is what you can think of as revenue generated from the fees on transactions and the remainder came from value added services. However way you look at it, Visa's business has grown quite nicely for a very long time. So over the past year, revenue grew by 11%, non-GAAP EPS grew by 14%. The US business is the more mature business for Visa while the international business is growing faster due to card adoption catching up with the US especially in emerging markets. Furthermore, the value added services segment is growing faster than the core business as in Q4 2025 it (33:50) grew by 25% and it's been critical in helping Visa continue to diversify just beyond transaction fees. And Visa's business model just scales incredibly well. They've built out their network and infrastructure. So each incremental transaction that flows through the top line is it comes at a very small additional cost. So this drives powerful operating leverage over time. (34:19) So, as global payment volumes continue to rise, Visa is able to convert a growing portion of that revenue directly into free cash flow for shareholders. To help illustrate this, over the past decade, revenues have compounded at around 11% and earnings per share has compounded at 17%. (34:40) Since the growth in earnings per share can be a good proxy for the increase in the intrinsic value of the company over that time period, we shouldn't be surprised to find that shareholder returns with dividends included are also around 17% peranom. So assuming that you can purchase Visa at a reasonable valuation, then you should continue to see long-term returns coincide with the continued growth in earnings per share. (35:04) And a lot of investors talk about finding companies with a big opportunity to reinvest and grow the business. The thing about Visa is that they just don't necessarily need to reinvest to continue growing. So when you look at the cash flow statement over the past year, they've made over $1.5 billion in investments through their capex line item. (35:28) When you compare that level of capex to a company like Meta, which I recently purchased for my own portfolio, it's practically nothing considering that Meta is guiding for over $100 billion in capex in 2026. Visa invests heavily in its global transaction processing network, Viset, to ensure speed, reliability, and nearperfect uptime. This includes spending on data centers, servers, storage systems, and network equipment. (35:52) And these investments allow Visa to handle ever growing payment volumes securely across thousands of financial institutions worldwide. They also invest significantly into hardware and systems that are designed to prevent fraud, manage risk, and protect sensitive payment data. (36:13) Given Visa's scale and the importance of protecting its brand and reputation, these investments are critical for banks and their customers to maintain confidence in using Visa's network. According to caner brand study on the most valuable global brands, Visa ranked number seven on the list in 2024. So Visa is obviously done a great job protecting the value of their brand as the uptime for the Visa network is around 99.999%. (36:38) So consumers have a reason to trust using their Visa card whenever they need to make a digital transaction. With that said, the vast majority of the cash flow that Visa generates is deployed into share repurchases. In fiscal year 2025, Visa generated over $21 billion in free cash flow, and they deployed more than $18 billion into share repurchases. (37:06) As a result, Visa retires nearly 3% of their shares outstanding each year. Visa also has strong future prospects to continue their growth trajectory. As I outlined in the beginning, Visa gets a small slice of each transaction that they are involved with. (37:24) The World Bank estimates that global personal consumption expenditures or PCE, which is a fancy way of saying global spending, it consistently grows at around 2 to 3% per year. If we tack on around 2 to 3% inflation, that gives us around 4 to 6% growth for Visa, assuming that they just maintain their current market position. Because Visa's fees are largely set as a percentage of total transaction volume, the company acts as a natural inflation hedge since their revenue increases directly alongside the cost of goods sold. (37:55) This structure allows them to capture the upside of a higher priced economy without the burden of rising raw material costs or significant capital expenditures. Furthermore, their dominant position in a global duopoly provides them with significant pricing power and the ability to maintain 60% operating margins even during periods of economic stress. (38:20) While the US remains the most mature market for the company, its trajectory through 2030 will be increasingly defined by higher volume growth in its international segment, most notably in emerging markets in Asia, the Middle East, Africa, and Latin America. Visa is benefiting from the global shift from cash to digital transactions. (38:41) Believe it or not, today there is more than 11 trillion in consumer spending still happening in cash or checks. And Visa is well positioned to benefit from more of that spending transitioning to digital. This shift is being driven by the convenience of digital payments, the growth of e-commerce, and the rapid adoption of smartphones and internet access worldwide. (39:00) As the global economy shifts further towards digital storefronts, Visa stands as a primary beneficiary because e-commerce transactions are almost exclusively electronic, eliminating cash from the equation entirely. But looking towards 2030, a more radical shift is occurring with the rise of agentic commerce where autonomous AI agents navigate the web to negotiate and execute purchases on our behalf. (39:26) For this to really work, these AI agents require a secure programmable identity to authorize payments without a person being present for every click. Visa is positioning its network to be the underlying trust layer for these machines, ensuring that an AI can hand over digital credentials that are just as secure as a physical card swipe. (39:49) This essentially transforms Visa from a tool used by people into an invisible financial operating system for the entire AI economy by building these machine-to-achine rails. Now, Visa is ensuring it remains the toll collector even when a human is not involved in the transaction. Governments and financial institutions are also encouraging electronic payments to reduce tax evasion, improve transparency, and lower the costs associated with handling physical cash. (40:21) When considering the growth in spending, inflation, and this mega trend towards digitization, Visa is expected to capture around 9 to 10% topline revenue growth for the foreseeable future. And you can already see that in the numbers today. Over the past five years, which excludes 2020 since that's really an anomaly, revenue grew by 13 a.5% on average over that time period, and each year was around 10 to 11% growth. (40:46) But 2022 was also a bit of an exception because they had a post-pandemic rebound in global travel and crossber spending. Their value added services segment is also a key area for future growth. Visa shared in their investors presentation that the broader value added opportunity could be north of $500 billion annually for just this segment. (41:12) As payments are becoming more complex globally, demand continues to rise for services that enhance security, support the continued digital transformation, and meet evolving merchant and consumer expectations. So as digital payments continue to grow worldwide and businesses look for integrated solutions, value added services is a key growth engine that could help generate strong returns for shareholders. (41:32) When we consider the secular growth for the core business and then layer on value added services and their new flow segment, Visa should be growing their top line in the low double digits, perhaps 11 or 12% and grow their bottom line earnings per share by around 15% after factoring in operating leverage and share buybacks. (41:51) Share buybacks don't effectively grow the business, but they do grow earnings per share due to the lower share count that occurs over time. Visa has historically traded at an elevated valuation level and as long as their moat remains intact and there aren't any unexpected structural changes to the industry, I believe the elevated multiple is justified due to its dominant market position in the durability of the business. (42:15) Not many companies can continue to grow earnings in double digits year after year and do so with relatively low risk. When we look back over the past decade, Visa's PE ratio has been around 30 or so. From time to time, we've seen this metric dip below 30, but usually it's been short-lived, either because the earnings continue to march upward or because the market re-raised the stock higher. (42:40) Today, the PE multiple trades at around 32 with a $330 share price. For investors interested in adding shares of Visa to their portfolio, I could foresee two ways to get exposure. First is to view today's price as fair and not try to time the market and just let the compounding process start to work for you immediately. But you also have to accept the potential for a multiple contraction. (43:03) If in 5 years the business continues to execute, but the earnings multiple rerates from 32 to 27, for example, then you won't lose money as an investor, but you may have been better off allocating your capital elsewhere where you didn't see this multiple contraction. (43:22) For example, investors who purchased shares of Visa in 2021, they were paying north of 45 times earnings as everyone was excited about the structural shift from the analog world to the digital world. But shares of Visa underperformed the broader market since that time frame because the shares were overpriced with the benefit of hindsight. (43:40) Of course, the alternative would have been to patiently wait for the market to give you an even better price. As I mentioned earlier, shares of Visa have occasionally traded below 30 times earnings. So waiting for a better price can help minimize the risk of a multiple contraction in the future, increasing the odds of getting a return of say 10% or more. (43:59) The other consideration in purchasing a company like Visa is the holding period. If you potentially need to sell shares within the next 2 or 3 years, then that can increase your risk as an investor because the market can just do some crazy things in a short period of time. The longer your holding period when holding highquality companies, the lower your risk because time is on your side as the intrinsic value of the company grows year after year. (44:25) When we look at the share price of Visa, you can clearly see that this is a compounding machine. The underlying business continues to increase as the earnings per share increase pretty much every year. and the increasing earnings acts like a gravitational force that lifts the share prices higher over time despite any temporary headwinds or narratives the company faces. (44:46) When we look at the risks for a company like Visa, the main risk is the one that many of the best companies in the world face and that is a regulatory risk. The best companies experience regulatory risk because their business models are so good and their moes are so wide that it takes regulators to step in and try and prevent them from earning excess profits. (45:10) And the same goes for merchants as they do whatever they can to try and minimize the fees they're paying to the banks and to Visa and Mastercard. However, it seems to me that regulation might even be a source of competitive advantage as they've spent decades building relationships with regulators and securing the licenses needed to operate in nearly every major economy. (45:30) Although Visa doesn't disclose its total litigation fees, estimates suggest the company often spends hundreds of millions of dollars per year and in more contentious periods, that figure can climb to more than $1 billion annually when settlements and reserves are included. A major driver of these fees have been merchant antitrust and interchange fee lawsuits where Visa has repeatedly faced claims that its network rules unfairly inflate costs for retailers. (45:55) One high-profile example is the long-running US merchant interchange litigation, which ultimately resulted in a multi-billion dollar settlement and ongoing legal provisions, which highlights how regulation and litigation are persistent cost of doing business for Visa. (46:14) This regulatory pressure doesn't necessarily mean that Visa is price gouging, but rather its scale and market position naturally attracts scrutiny. Visa's fees are largely set as a percentage of transaction volume, meaning its profits grow alongside global commerce, not because it's arbitrarily raising prices. Regulators and merchants often focus on interchange fees because they're visible and widespread. (46:39) Even though Visa itself doesn't directly collect most of the fees in a single transaction, still when a network touches nearly every transaction in the economy, even small fees can look enormous in aggregate. That makes Visa an easy target during periods of political or economic stress. Although Visa's MO is in fact strong, it does face competitive pressure in different markets around the world. (47:03) For example, some governments have shown a preference for local payment networks which could keep Visa at a certain markets. In India, the government launched the unified payments interface which is a realtime system that moves money directly between bank accounts. We see something similar happening in Brazil where the central bank's payment system now accounts for nearly half of all payments in the country despite only launching in 2020. (47:29) And I haven't even mentioned China yet. Both Visa and Mastercard are practically non-existent in China as the statebacked network Union Pay holds a legal monopoly in China. China also took the leap by bypassing plastic cards entirely, opting instead in favor of super apps like Alip Pay and WeChat, which now control over 90% of the digital payments market in China. (47:59) Despite Visa's attempts to enter the Chinese market, it's largely kept out due to regulatory barriers. Europe has attempted to launch their own governmentbacked networks as well, but they've been less successful in rivaling both Visa and Mastercard at scale as Visa and Mastercard still process the vast majority of card transactions across Europe. So, in Visa's major, more mature markets, they are deeply entrenched and consumers overall benefit from using both Visa and Mastercard's networks. But even in the more mature markets, new solutions for payments are popping up and Visa is well aware of (48:33) this. One is the rise of accounttocount payments which let consumers pay someone through their bank account directly which bypasses Visa entirely. I actually didn't know that this was a real option for making payments. But it turns out that adoption has been slow in their more mature markets. (48:58) But if the user experience and technology around it improves, then that could pose a headwind for Visa. But again, we need to understand the incentives. If consumers earn rewards by swiping their card or simply use their Visa card out of habit, then why use another tool that doesn't offer such an incentive? But Visa is actually on top of the industry trends here as they're actively building their own rails for ADOA transactions which is called Visa Direct and they also acquired a company in Europe to further expand this offering. (49:29) Since government-backed competitors offer these basic transfers for free, Visa monetizes these flows by layering on value added services like instant fraud screening and global interoperability that a local banktobank system just simply can't match. They've turned a commodity service into a premium one by adding these security protocols that consumers expect from a standard credit transaction. (49:55) and the idea of a new entrant just generally entering the space and competing directly with Visa and Mastercard. I think just generally it's just not going to happen. Companies like Apple, Google, Stripe, Square, and PayPal, they've all been involved in this payment space and their solutions are built on top of Visa and Mastercard's rails rather than competing headto-head to them. (50:20) I don't use Apple Pay too often, but I know a lot of people do. And Visa helps make the payment process through your phone just seamless and easy. So, if I happen to not have my wallet with me, or I just want to have the convenience of using Apple Pay, like I'm taking the subway in New York, for example, it's it is a nice option to have. (50:41) And then Visa has also enabled other convenient options to make payments such as tap to phone and payments based on QR codes. Just prior to recording this episode, Visa also released their Q1206 earnings report and that actually ended at the end of 2025. So that's a fiscal year Q1 2026. The company continued to showcase strong operating performance. Revenues were up 15%. (51:04) Non-GAAP earnings were up 15% as well. And during the quarter, the company generated $6.7 billion from operating activities. And just 370 million was deployed into capital expenditures. And that illustrates what I was talking about earlier, how this is a very capital-like business. (51:26) And this has allowed them to send the vast majority of their cash flow back to shareholders in the form of buybacks and dividends. The company also provided guidance for fiscal year 2026 for both net revenue growth and earnings per share growth. They forecast this to increase in the low double digits. Given the operating leverage I highlighted earlier, I personally would expect earnings to grow faster than revenue. (51:44) But I think this illustrates that Visa is doing some reinvestment through the income statement in developing new offerings, enhancing their current offerings, and you just don't find a lot of companies that can grow at a double-digit clip in a relatively low risk way like this. So, of course, every company has its fair share of risks, and there are no 100% certainties, but we do our best as value investors to find companies that offer attractive riskreward profiles and are trading at good prices. So, if you're an investor (52:15) who underwrites returns closer to 20%, then you might need to look elsewhere in the market. But if you're satisfied with say a 10% return, maybe closer to 15% in the bull case, then Visa might be a company worth considering. or perhaps you put it on your watch list and just wait for the next market panic. (52:33) Visa is one of those companies where it's certainly a great business, but the biggest problem is that the market already knows that. So, a lot has to go right to get solid returns from here. So, while covering Visa, I thought it'd also be a good opportunity to talk a little bit about one of their main competitors, American Express. I know I highlighted them a bit earlier. (52:52) So they operate the closed loop model and then Visa and Mastercard of course have the openloop model. Interestingly Berkshire Hathaway has American Express as their second largest position in their public equity portfolio. Bergkshire initiated a position in AMX in 1991. (53:14) This means they've been holding the stock for more than 35 years bringing the value of the position to over 50 billion. And similar to Visa and Mastercard, AMX's stock has performed quite well over the years, beating the market over about any time frame. While shares of American Express might seem more attractive on the surface, as they trade at a lower PE ratio, it's not really an applesto apples comparison since AMX is also in the business of extending credit. (53:38) So AMX acts both as a payment processor and a card issuer. So, they take on credit risk as consumers swipe their MX cards and take on loans. The card I use more than any other is actually the MX Blue Cash card. It gives me 3% back on groceries, online retail purchases, and gas, and then 1% back on most other purchases. (54:00) However, I wouldn't be able to get by with just my MX card. Occasionally, I'll go and shop at Costco. I prefer to get gas at Costco, but Costco only accepts Visa credit cards for instore purchases. So, that essentially forced me to sign up for their Costco anywhere Visa card, which I don't necessarily mind since the card gives 5% cash back on gas and 2% cash back in store. (54:25) And, you know, that helps me cover the cost of my annual Costco membership fee. AMX's primary focus is on premium cards for higher income individuals. The business was started all the way back in 1850 and they've really built a reputation for premium customer service, exclusive membership benefits, and a strong presence in the payments industry. Today, MX accounts for roughly 4% of credit cards in circulation in the US. (54:51) But since they target more affluent consumers who tend to swipe their cards more and make larger purchases, they account for around 20% of the total purchase volume among the major US card networks. Although AMX competes directly with Visa and Mastercard, its strategy is pretty different. (55:14) With their closed loop model, they intentionally focus on these more affluent consumers by issuing cards that require high annual fees. And that's designed to attract these consumers who spend more, prioritize luxury, travel, and these exclusive perks. and AMX users have around two times as high of incomes than the average American and spend twice as much on flights and accommodations on an annual basis. Although merchants might not like the higher fees that AMX charges on each transaction, it can still turn out to be a win for the merchant because if those consumers tend to spend more and enjoy using their MX card, then the bigger (55:46) shopping cart can more than make up for the additional fee that the merchant is paying. With this model, MX positions itself to benefit from higher transaction fees, more control, and a much closer relationship with its customers. (56:06) And since they issue the cards themselves, they not only earn fees on each transaction, but they also generate revenue from the annual fees on their higher-end cards and from interest on the balances for those cards. Despite charging some of the highest annual fees in the space, they are the top rated credit card company based on factors like customer satisfaction and trust. (56:26) And this has given them room to hike their annual fee significantly over the years as they update a card levels benefits every few years. So since 2019, the average fee per card has compounded at 12% peranom. And there are additional benefits of issuing cards to wealthier cohorts of society. These consumers tend not to change their spending habits as much even during the tougher economic conditions. (56:51) And they also have lower delinquency rates, meaning that when they acrew a balance on their credit cards, they're more likely to pay that balance off. And despite AMX being around for more than 175 years, there is still an opportunity to grow and expand its business. Today, over 75% of AMX's revenue comes from the US, which leaves room for them to grow internationally. (57:17) Over the past 10 years or so, management has taken steps to grow outside the US. And the primary challenge was just gaining the merchant acceptance. And they have managed to gain traction as there's around 80% acceptance in their top international markets and more than 90% acceptance in top tourist attraction areas. Similar to Visa and Mastercard, AMX also sees the benefits of operating leverage. (57:43) Since 2020, AMX has increased its number of cards issued on average by 6% per year, which now totals 152 million cards issued, generating $1.6 6 trillion in payment volume. While revenues have grown at 8% over the past decade, earnings per share grew at nearly 12%. AMX expects the credit card payment industry to grow at around 8 to 9% per year through 2034. (58:09) And they're confident that thanks to its favorable positioning, they'll be able to grow revenue at a double-digit rate, outpacing the broader industry. However, with all that said, with AMX issuing the credit cards themselves, they operate in just a brutally competitive industry, as there are several companies marketing to consumers, trying to capture their attention and issue them cards. (58:29) It seems that half the time when I check out at a local retailer, I get asked if I'd like to get a credit card there, whether that be a sports retailer or just when I'm shopping for clothes. So AMX's advantage comes from that closed loop model of likely having the ability to offer the widest breadth of rewards and from their brand name that's globally recognizable. (58:52) It's trusted and it's associated with prestige and exclusivity in many people's minds. Overall, I would expect all three of the payments giants to continue to perform well as the world continues to shift toward digital payments. All three benefit from this secular tailwind and shareholders also benefit from the prudence of management, the benefits of operating leverage and they see their share ownership continued to increase through share repurchase programs. To wrap up the discussion, Visa just checks all of the boxes for me (59:27) as an investor. The business is wellrun. It has high returns on capital, generates recurring revenues that increase alongside inflation. They have minimal need for reinvestment and it's riding these big secular mega trends. However, the market recognizes the advantageous position they're in. (59:46) So, the stock is close to priced to perfection. It's not a stock to get rich quickly on, but assuming that their entrenched position doesn't significantly change, then I would expect it to continue to compound at a good rate going forward. That wraps up today's discussion on Visa and the payments companies. (1:00:04) Thanks a lot for tuning in and I hope to see you again next week. Thanks for listening to TIP. Visit the investorspodcast.com for show notes [music] and educational resources. This podcast is forformational and entertainment purposes only and does not provide financial, investment, [music] tax or legal advice. (1:00:21) The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. (1:00:38) Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the investors [music] podcast network may hold positions in securities discussed and may change those positions at any time without notice. [music] References to any third party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them. [music] Copyright by the Investors Podcast Network. (1:00:56) All rights reserved. Their culture of being highly focused on reducing costs and increasing the level of automation has created a strong competitive advantage that is just really difficult to replicate. Now the question is how long will interactive brokers be able to grow. Pedy has shared that he sees strong potential for growth both in the US and internationally. (1:01:23) Today around 34s of the revenue does come from the US and Pedy sees the number of accounts growing substantially well into the future. So right now they have their sites set on reaching 20 million accounts up from four million today. But they certainly don't intend to stop
Visa Stock Deep Dive | Best Quality Stock Idea Q1 2026 w/ Clay Finck (TIP791)
Summary
Transcript
(00:00) With each debit or credit card swipe all around the world, they collect a small fee for helping facilitate digital transactions. Visa's mission is to connect the world through the most innovative, reliable, and secure payment network, enabling individuals, businesses, and economies to thrive. (00:21) Digital payments is something that I feel like we all sort of take for granted because it's something that has just become so central to all of our lives. And because it's something that's so ingrained in our daily life, it's easy to overlook its importance and the potential opportunity that awaits for investors. (00:39) Over the years, we've seen this shift globally to electronic payments. And this has been a very positive tailwind for Visa. Before [music] we dive into the video, if you've been enjoying the show, be sure to click the subscribe button below so you never miss an episode. It's a free and easy way to support us and we'd really appreciate it. Thank you so much. (01:03) Hey everybody, welcome back to the Investors Podcast. I'm your host KlayFink and today we'll be doing a deep dive on Visa. I've been interested in investing since I was 18 years old. And over the years, I've become more and more interested in individual stocks. As one manages their portfolio, you gradually learn, not just from reading, but from making mistakes and learning some of the most important investing lessons the hard way. (01:30) One lesson I've picked up is to take note of what some of the best investors in the world are doing. Now, that's not to say that you should just copy what the best of the best are doing, but maybe at least take note of it. Back in January 2023, my co-host Stig Broers and I were going back and forth on Alphabet. (01:48) The business fundamentals looked great and the valuation looked compelling. And one of the things that Stig brought to my attention was that Leelu from Himalaya Capital was adding significantly to his position in Alphabet. Now, Leelu is without a doubt one of the great investors of our time. So, this is something worth considering when buying a company like Alphabet. (02:13) Not only does Leelu look for limited downside when running such a concentrated portfolio, he's also looking for the potential for asymmetric upside as well. And the bet on Alphabet has played out quite well for him. But this isn't a bulletproof way to find ideas. For example, many people followed Charlie Munger into his Alibaba trade, and that case proved to not be a great bet, at least so far. (02:32) So, you might be wondering, what does this have to do with Visa? Well, the first thing I would mention is that several of the great investors of our time have major investments in Visa already. Many listeners have been asking me to bring Dev Kasaria back onto the show as a guest. (02:51) Consaria's firm, Valley Forge Capital Management, they have over $4 billion in AUM and according to their most recent 13F, over 7% of assets are invested in Visa and around 20% is invested in their competitor, Mastercard. Czech Ore's firm has a stake in Visa that's worth over $1 billion or 10% of their portfolio. Terry Smith, who my co-host William Green featured on the podcast last year, he has around a 6% position in Visa. (03:18) And most notably, Chris Hone from TCI Fund Management has an 18% position in Visa. And given that he manages north of $50 billion, this makes his Visa position worth over 9.5 billion. Hoen is an investor worth following because he's showcased compounded annual returns of more than 18% peranom for more than two decades. (03:42) That's around 9 percentage points better than the overall market. Furthermore, Hone added to his position in Q2 and Q3 of 2025. So, with shares of Visa today trading at around $330 per share, Hone was likely buying shares in the 330 to 350 range just a few months back, potentially making Visa an interesting buy at today's prices. (04:07) On the topic of network effects, Hone stated, "We found other barriers to entry, such as network effects. Payments is one. We've been a shareholder of Visa a long time where it has this huge ever-growing network connecting every customer in every bank to the world and as this network grows it becomes ever harder to replicate. End quote. (04:29) So when analyzing companies I think it can be helpful to revisit what exactly the best of the best investors look for when investing in companies. Dev Concessaria has been kind enough to share his investment approach here on the show so we can potentially get a glimpse into some of the things that he's seeing when he's looking at Visa since he currently owns a position in the company as of the time of recording. (04:49) One of the first things that Kasaria looks for in a business is predictability. If he can't predict where a business is likely to be in 10 years, then he's probably not interested in owning that company regardless of the potential for growth that lies ahead. (05:08) So he would rather sacrifice growth to ensure that he isn't likely to lose money over the next decade. In my interview with Kesaria, he stated, "We define quality as finding the perfect intersection between growth and predictability. You could have companies that are growing very fast, like a young software company, but you're not sure of where it's going to be 5 or 10 years in terms of the market share or industry dynamics. Or you can find a company that's extremely predictable. (05:33) We're trying to build a portfolio that on a weighted average basis can grow in the high teens to low 20s over the next decade, but can do so in a very predictable way. End quote. Another thing he looks for is a dominant business with pricing power, preferably companies that are in a monopoly or duopoly position. And as we'll discuss, I believe that Visa does have a pretty dominant position in the market. (05:58) Lastly, Constasaria wants to purchase businesses that are capital light, meaning that they don't require massive R&D expenses or capital expenditures. He wants businesses that print cash that can then be distributed to shareholders through buybacks rather than making a splashy acquisition. (06:17) He doesn't want to risk buying a business that prints a lot of cash and then decides to use that cash in a risky manner that ends up getting them into trouble. That's one reason why many big tech companies don't fit as well into Kisaria's framework. While big tech companies like Alphabet and Meta generate enormous cash flows, they reinvest heavily in R&D and data centers and infrastructure simply to maintain their competitive position, which also makes the future of these businesses less predictable. In in businesses like Meta and Alphabet, capital spending is not optional, but it's actually a (06:51) requirement to stay relevant, which reduces the durability and predictability of free cash flow over very long time periods. That dynamic also increases the temptation for large transformative acquisitions or ambitious internal projects that can introduce significant capital allocation risk. Before we get into where Visa sits today, it's important to understand how the company came to be. (07:16) The story of Visa began in 1958 with a bold and almost reckless experiment by Bank of America. They mailed 60,000 live credit cards to unsuspecting residents in Fresno, California, in an attempt to jumpstart a payment network out of thin air. This was the birth of the Bank America card, the very first consumer credit card with a revolving credit feature. (07:40) While mailing unsolicited credit cards is illegal today, this was the creation of a new financial ecosystem and it was the very first time that revolving credit started to become widespread. Usually when a consumer took on some amount of credit in a purchase, they had to be paid up by a certain date. (07:59) But with revolving credit, which is how credit cards work today, essentially you're able to keep a balance and acrue interest. So, the launch of the Bank America card was really the first time that consumers had access to this. As the program's popularity exploded, Bank of America began licensing their system to other banks across the US. (08:22) And by 1970, the network had grown so complex that it separated from Bank of America to form National Bank Americard, Inc. This transition turned the network into a cooperative owned by many banks that issued the cards. Now, the shared ownership model was crucial as it allowed the network to scale rapidly without being controlled by a single bank. (08:43) In the early 1970s, Bank Americard automated much of the process that needed to happen in a transaction, such as the authorization and interchange, and this made it significantly easier and more efficient to make transactions. As a result, transactions could be processed at any time. (09:04) Authorization times dropped from 5 minutes to 50 seconds, and banks cleared and settled transactions overnight instead of taking a week or more. To conquer the global market, the company underwent a major transformation in 1976 by rebranding as Visa. The name was chosen because it's simple, memorable, and sounds exactly the same in every language, signaling their ambition for universal acceptance. (09:25) Now, at this time, let's assume that we're a bank that works with merchants and you want merchants to start accepting credit cards from tourists. I'm sure many people in the US travel to London, so we can use that as an example. So, let's assume that the banks work with merchants in London. In order for a transaction to take place, the banks in London, they need to have a way of communicating with each of the tourist banks so that the transaction can be approved and money can be transferred. That means that software (09:56) needs to be developed that is integrated with every single one of the tourist banks and every single one of the merchants point of sale systems. There also needs to be support for hundreds of languages and currencies and compliance with thousands of local laws and regulations. (10:16) And the entire process needs to be automated, fast, and operate with zero failure or downtime. This whole complicated process is what Visa managed to put together. The most significant turning point in Visa's modern history that arrived in 2008 when the company transitioned from a private bank-owned cooperative to a public company. Its IPO was one of the largest in history, raising $19. (10:40) 1 billion, reflecting the massive value of its global network. Since then, Visa has continued to expand, acquiring Visa Europe in 2016 to unify its operations into one global powerhouse. Today, it stands as the dominant toll booth on global commerce, facilitating trillions of dollars in transactions every year. (11:02) So, Visa has recently been in the headlines due to President Trump urging US lawmakers to pass legislation to limit credit card interest rates to 10%. In order to help Americans save on the amount of interest they're paying on credit cards, Ironically, Visa's stock was down 6% in the days after the announcement. But the irony is that credit card interest rates do not directly impact Visa's business because Visa doesn't lend money. (11:25) They don't set interest rates or they don't earn interest income. Visa earns fees based on transaction volume and payment processing. However, a hard cap on interest rates could indirectly affect Visa if it leads to banks tightening credit standards, reducing credit issuance, or lowering credit limits, which would reduce their transaction volume. (11:51) Credit card issuers might also pull back on rewards programs or marketing, slowing spending growth in credit cards relative to debit cards or alternative payment methods. In a more extreme scenario, some high-risk consumers could lose access to credit cards altogether, further pressuring volumes. So, while Visa isn't exposed to credit risk, regulatory changes affecting issuer economics can still ripple through to its growth outlook. (12:15) But with that said, I think it's pretty unlikely that a cap on interest rates would get passed as it would require congressional approval and would likely face strong opposition from banks, card issuers, and industry lobbyists. Even if legislation were introduced, it would almost certainly face significant legal and constitutional challenges, making implementation far from certain. (12:42) So, in my view, it's a classic example of the market acting irrationally based on investor sentiment. Even if the fundamentals haven't materially changed, the market can move stock prices in directions that just don't exactly make sense, bringing potential opportunities for us as value investors. So, diving in here to discuss Visa's business model, the easiest way to think of Visa is that together with Mastercard, it's a toll booth on the global economy. (13:08) With each debit or credit card swipe all around the world, they collect a small fee for helping facilitate digital transactions. Visa's mission is to connect the world through the most innovative, reliable, and secure payment network, enabling individuals, businesses, and economies to thrive. (13:30) Digital payments is something that I feel like we all sort of take for granted because it's something that has just become so central to all of our lives. And because it's something that's so ingrained in our daily life, it's easy to overlook its importance and the potential opportunity that awaits for investors. Over the years, we've seen this shift globally to electronic payments. (13:49) And this has been a very positive tailwind for Visa. Tying back to Hone's point about network effects, Visa is connected to more than 4 billion card holders, 150 million merchants worldwide, and nearly 14,500 financial institutions. By the looks of it, if anyone is interested in trying to disrupt Visa starting from scratch, that ship has just sailed. (14:12) It would be incredibly difficult to build the network that they have built and steal market share from them. But as I'll touch on at the end, there are a few potential threats and cases of competitors gaining a dominant position in different markets globally. (14:31) While today Visa is known for its logo on credit and debit cards, they do not actually extend credit or issue cards themselves. They leave it to the banks to issue the cards and take on the credit risk. Think of players like Chase, Capital 1 or Barclays. Visa on the other hand operates as the payment network that operates behind the scenes. (14:49) So we can think of them as the payment rails that facilitate transactions. If we think about all the payments happening all around the world every second of the day, Visa in addition to Mastercard are like an interstate highway system that collects a tiny toll fee for every car that drives on it. So to understand how Visa plays a role in the payments industry, let's walk through an example of what happens when you make a purchase. (15:15) So first I'll mention that there are five parties involved in every digital transaction. Let's say you walk into your local Chipotle, order your bowl with chicken and guac, and go to checkout, and you decide to use your Visa debit card that you got from JP Morgan Chase. So, you the listener would be the first party, which we can call the consumer. (15:40) You ordered your bowl at Chipotle in this example. So, we can call Chipotle the merchant. You then swiped your debit or credit card that was issued by JP Morgan Chase. That party we can call the issuing bank. And then we have Chipotle's bank which in this case we can just say is Cityroup in this example. And then lastly we have Visa. (16:00) Once the card is swiped, Visa is transmitting the data necessary between banks to ensure that you are good for the payment in a matter of less than a second. So Visa sits in the middle of this process of making digital transactions and they help ensure that this process is just entirely seamless. (16:19) The two banks involved in this example along with Visa are collecting a fee on each transaction and that fee tends to be around 2 to 3% in aggregate which is paid by the merchant and not paid by the consumer. One of the reasons that these payment rails are so deeply entrenched in our modern economy is that consumers get paid rewards for using these cards. (16:41) The card I use the most is actually an American Express card. I just love it because it pays a solid reward most of the times that I swipe it and use it. But I also have a Visa card in my wallet that I like to use as well. American Express is a bit of a different conversation, but they operate what we can refer to as a closed loop network. (17:02) Since American Express implemented this closed loop model, this led to their market share relative to Visa and Mastercard being much lower. But anyways, on many of these credit card transactions, the consumers are getting a reward for using that card, and that's ultimately paid by the merchant, but the merchant needs to have a payment method available that consumers are accustomed to using. (17:29) So, it's a bit of a chicken and an egg problem. the merchants don't necessarily want to pay 3% on every transaction they accept. But if they only accepted cash, that would likely lead to significantly less sales volume since people are so accustomed to using these cards and there just hasn't been a way for a new entrant to enter the market and take substantial share from Visa and Mastercard because of the rewards that keep customers coming back and using those cards. (17:58) So the network effect that these payment networks have are just substantial. So there's a very strong incentive for merchants to accept these cards and utilize Visa's network because the banks and Visa do the work of ensuring that the consumer is good for the payment. And in this process, Visa is going to earn around.1% or 2%. (18:22) So if we're looking at a $100 purchase, they're getting something like 13 cents, 15 cents. and it's a relatively small amount of the value captured. So, to put this in perspective, I like to get my gas at Costco. Let's say I spend $100 on gas there. My Visa card actually uh pays me 5% cash back on that purchase. So, I'm getting $5 in rewards. I'm not sure what the agreement is between Visa and Costco, but perhaps they're getting. (18:49) 1% in that agreement due to Costco's huge bargaining power. So out of the $100 spent, Visa would receive just 10 cents for helping facilitate the digital transaction. The main strength of Visa's business model is that network effect that they've built up over decades. (19:10) And for a new entrant to truly disrupt this network effect, they wouldn't just need a better app or a faster chip. They would have to convince tens of millions of merchants and thousands of financial institutions to abandon a system that already works perfectly. (19:29) Imagine that you built a new payment rail and you needed to start getting partners on board. If you walk into your local coffee shop and you told them all these reasons why your payment rail was better, they just wouldn't care to use it if no customers have the means of using that payment. And no customers are going to want to use it if merchants aren't going to accept it. So again, it's that chicken and egg problem. (19:54) Even the most well-funded fintech giants usually find it cheaper and easier to simply ride on top of Visa's rails rather than trying to create their own. So ultimately, Visa and Mastercard are the trusted networks, making the cost of switching away from their network prohibitively high for the entire global economy. (20:18) What's also really important is that Visa operates globally and they receive higher fees through crossborder transactions. So the last time I left the US was back in 2021 when I visited my co-host Stig Broers over in Denmark. I recall one evening I was going on a walk keeping an eye out on a spot I could grab dinner and I realized that my phone was about dead and I did not have any cash on me. (20:41) In times like this, when you're exploring a foreign city you don't know, well, Visa can sometimes feel like a savings grace. I ducked into a small cafe, ordered a sandwich and an iced tea, and I tapped my Visa card to pay without even thinking. I didn't need the local currency. (21:00) I didn't need to necessarily do the math on currency conversion, and I did not need to wonder if they accepted my Visa card. The transaction was approved in seconds. The receipt popped out instantly and I was back outside walking the Danish streets. But without Visa, I would have needed to use cash, which means hunting down an ATM, paying egregious fees, and hoping that I don't misjudge the amount of cash that I would need. (21:30) With Visa, the trust is already built in between me, the merchant, the bank, and a global network that's just quietly working for me in the background. And crossber transactions are actually quite an integral part of Visa's business. Because of the increased complexity, risk, and the currency exchange involved in crossber transactions, Visa is able to capture a higher fee than a domestic transaction. It tends to be around three times higher. (21:56) Despite crossber transactions making up just 10% of Visa's payment volume, they account for more than 1/3 of revenue. Are you looking to connect with highquality people in the value investing world? Beyond hosting this podcast, I also help run our tip mastermind community, a private group designed for serious investors. Inside, you'll meet vetted members who are entrepreneurs, private investors, and asset managers. (22:20) People who understand your journey and can help you grow. Each week, we host live calls where members share insights, strategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next stockpick, but also sharing lessons on how to live a good life. (22:40) We certainly do not have all the answers, but many members have likely faced similar challenges to yours. And our community does not just live online. Each year, we gather in Omaha and New York City, giving you the chance to build deeper, more meaningful relationships in person. One member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth and happiness. We're capping the group at 150 members. (23:06) And we're looking to fill just five spots this month. So, if this sounds interesting to you, you can learn more and sign up for the weight list at thevespodcast.com/mastermind. That's thespodcast.com/mastermind. or feel free to email me directly at claytheinvespodcast.com. If you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. (23:40) Each week, Shawn and Daniel do in-depth analysis on a company's business model and competitive advantages. And in real time, they build out the intrinsic value portfolio for you to follow along as they search for value in the market. So far, they've done analysis on great businesses like John Deere, Ulta Beauty, Autozone, and Airbnb. (23:58) And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It's rare to find a show that consistently publishes highquality, comprehensive deep dives that cover all of the aspects of a business from an investment perspective. Go follow the intrinsic value podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. (24:23) I mentioned a bit earlier that I do use an American Express card. So you might be thinking what prevents American Express from stealing share from Visa and Mastercard. The primary barrier for American Express is its closed loop model. (24:42) It requires the company to act as both the network and the bank, limiting its ability to partner with thousands of global financial institutions that work with Visa and Mastercard. And because Amxed, they historically charge higher merchant fees to fund their premium rewards. So many smaller or many international businesses just simply refuse to accept American Express in their stores. (25:05) While MX's rewards are pretty attractive, they're financed by these higher merchant costs. So, it's a strategy that works for luxury travel, but it struggles to compete with the lowcost, high volume utility model that Visa and Mastercard provide for everyday essentials. (25:24) Additionally, Visa and Mastercard's openloop system allows them to scale exponentially by letting banks like Chase or Bank of America, they're doing the heavy lifting in terms of the customer acquisition and the credit risk. Due to the business model that AMX selected, Visa and Mastercard own a lion share of the overall market. So, when we exclude China, Visa is estimated to have around 60% of the market. (25:50) Mastercard is estimated to be at around 25% and American Express is just over 10%. While MX lacks the universal reach of the others, it compensates by intentionally targeting affluent consumers who spend more and are worth significantly more per swipe to a merchant than the average consumer. (26:11) So, by positioning itself as a status-driven club rather than a basic utility, AMX creates a virtuous cycle where higher-end retailers are willing to pay those higher fees just to gain access to the deep pockets of the MX card holder. (26:30) And these retailers are certainly paying for more access to these types of customers as the fee they charge, it tends to be around.7% higher for in-person transactions. And much of this, of course, goes back to the consumer in the form of higher rewards. And when we look at the banks involved, they also have an incentive to work with players like Visa and Mastercard. So, one of Visa's most popular cards is JP Morgan's Chase Sapphire card. (26:54) JP Morgan Chase has an incentive to issue those cards and push a lot of payment volume through those because they will get these big financial incentives and rebates from Visa which is also just difficult to disrupt because Visa is operating on such a massive scale. In 2025, Visa facilitated over $16 trillion in volume. That's 16 with a T. (27:21) And you can of course see some competition between Visa and Mastercard attempting to steal these banking partnerships from each other, but in reality it just does not happen very frequently. Another segment that investors should be aware of is what Visa refers to as new flows. This segment is going to be less familiar to most people as it includes B2B payments, peer-to-peer transfers, and government dispersements. (27:53) Visa is building the tools to digitize and route those flows over its network and they are just beginning to tap into this market opportunity. So according to Visa, this segment addresses a $200 trillion market opportunity and currently Visa handles less than 1% of that volume. And then Visa's third business segment is its value added services which accounts for around 1/4th of their business. (28:18) The value added services suite of offerings. It goes beyond just basic payment processing. These services include things like real-time fraud detection, risk and security solutions, digital checkout tools, analytics, open banking capabilities, and advisory or consulting services. (28:41) This business is important because of Visa's global network, and the unique insights they have access to. With their massive database, they can provide insights on trillions of data points and transactions. In addition to helping diversify their business, this segment is also high margin and helps deepen their customer relationship with banks. (29:04) What's also really interesting to me about Visa is how some investors view Visa and Mastercard essentially as one and the same. This perspective stems from the fact that both companies seemingly operate these identical toll booth business models where they provide the underlying infrastructure for global payments, but they aren't taking the credit risk with the loans. (29:26) So, because they share the same secular tailwinds, investors often treat them as a singular bet on the growth of the global economy. So, I wanted to be sure to take some time to compare and contrast Visa and Mastercard to just better understand their differences. So, to compare these two giants, it's best to start with their global footprints and scale. (29:45) Visa is just the undisputed heavyweight. They're capturing around 60% of the market excluding China. Mastercard, as I mentioned, was at 25%. Geographically, Visa is more dominant in the US where it processes over double the volume of Mastercard. (30:06) However, Mastercard has historically maintained a slightly more balanced international presence, particularly in Europe, where the market share is closer to a 50/50 split. Despite these differences in scale, their business models are almost identical. Both operate these openloop payment networks that don't issue cards or don't take on the credit risk. (30:24) They both generate high margin revenue through transaction fees, crossber services, and an increasing focus on value added services like fraud detection. So, it's easy to view them just as a duopoly that grows in tandem with the global shift from cash to digital payments. So, from an investor's perspective, the choice between the two often comes down to a trade-off between Visa's sheer size and Mastercard's potential for slightly higher growth. (30:52) Visa's massive scale and high margins make it an incredibly durable cash flow machine. And meanwhile, Mastercard is often seen as being slightly more aggressive in pursuing the new flow segment and non-card payment technologies. (31:12) And because they share the same regulatory tailwinds and risks, many investors just simply choose to invest in both to capture the entire industry's growth. Historical shareholder returns align with this view as well. So since the start of 2017, shares of Mastercard grew at around 20% per year while Visa grew at around 16%. But it also depends on which time frame you're looking at because if you look at the returns since the start of 2022, shares of Visa have actually outperformed which also makes sense because Mastercard's valuation was a bit higher at that time at the start of the period. While Visa and Mastercard are fierce competitors in this payments (31:47) industry, they're viewed as what we can refer to as a rational duopoly. The two players prioritize maintaining high industry margins rather than engaging in these destructive price wars. So instead of cutting fees to steal market share from the other, this would just erode their margins that both companies certainly enjoy, they instead focus on expanding the total addressable market by converting the world's remaining 11 trillion in cash transactions to digital payments. This cooperation ensures that while they compete on innovation and (32:24) security, the underlying toll they collect remains stable. So it effectively is treating this global commerce as a shared infrastructure that rewards both players for its continued growth. One of the most impressive things about Visa's business is just its financial profile. Gross margins are 80%, operating margins are 60%. (32:51) And [clears throat] when you look at large cap publicly traded companies, that is just some of the best margins you're going to find. One company I can think of that has an even better margin profile than Visa is the company I covered last quarter on episode 768. That company is Interactive Brokers. So in fiscal year 2025, Visa generated around 40 billion in revenue. (33:15) Around three4s of that is what you can think of as revenue generated from the fees on transactions and the remainder came from value added services. However way you look at it, Visa's business has grown quite nicely for a very long time. So over the past year, revenue grew by 11%, non-GAAP EPS grew by 14%. The US business is the more mature business for Visa while the international business is growing faster due to card adoption catching up with the US especially in emerging markets. Furthermore, the value added services segment is growing faster than the core business as in Q4 2025 it (33:50) grew by 25% and it's been critical in helping Visa continue to diversify just beyond transaction fees. And Visa's business model just scales incredibly well. They've built out their network and infrastructure. So each incremental transaction that flows through the top line is it comes at a very small additional cost. So this drives powerful operating leverage over time. (34:19) So, as global payment volumes continue to rise, Visa is able to convert a growing portion of that revenue directly into free cash flow for shareholders. To help illustrate this, over the past decade, revenues have compounded at around 11% and earnings per share has compounded at 17%. (34:40) Since the growth in earnings per share can be a good proxy for the increase in the intrinsic value of the company over that time period, we shouldn't be surprised to find that shareholder returns with dividends included are also around 17% peranom. So assuming that you can purchase Visa at a reasonable valuation, then you should continue to see long-term returns coincide with the continued growth in earnings per share. (35:04) And a lot of investors talk about finding companies with a big opportunity to reinvest and grow the business. The thing about Visa is that they just don't necessarily need to reinvest to continue growing. So when you look at the cash flow statement over the past year, they've made over $1.5 billion in investments through their capex line item. (35:28) When you compare that level of capex to a company like Meta, which I recently purchased for my own portfolio, it's practically nothing considering that Meta is guiding for over $100 billion in capex in 2026. Visa invests heavily in its global transaction processing network, Viset, to ensure speed, reliability, and nearperfect uptime. This includes spending on data centers, servers, storage systems, and network equipment. (35:52) And these investments allow Visa to handle ever growing payment volumes securely across thousands of financial institutions worldwide. They also invest significantly into hardware and systems that are designed to prevent fraud, manage risk, and protect sensitive payment data. (36:13) Given Visa's scale and the importance of protecting its brand and reputation, these investments are critical for banks and their customers to maintain confidence in using Visa's network. According to caner brand study on the most valuable global brands, Visa ranked number seven on the list in 2024. So Visa is obviously done a great job protecting the value of their brand as the uptime for the Visa network is around 99.999%. (36:38) So consumers have a reason to trust using their Visa card whenever they need to make a digital transaction. With that said, the vast majority of the cash flow that Visa generates is deployed into share repurchases. In fiscal year 2025, Visa generated over $21 billion in free cash flow, and they deployed more than $18 billion into share repurchases. (37:06) As a result, Visa retires nearly 3% of their shares outstanding each year. Visa also has strong future prospects to continue their growth trajectory. As I outlined in the beginning, Visa gets a small slice of each transaction that they are involved with. (37:24) The World Bank estimates that global personal consumption expenditures or PCE, which is a fancy way of saying global spending, it consistently grows at around 2 to 3% per year. If we tack on around 2 to 3% inflation, that gives us around 4 to 6% growth for Visa, assuming that they just maintain their current market position. Because Visa's fees are largely set as a percentage of total transaction volume, the company acts as a natural inflation hedge since their revenue increases directly alongside the cost of goods sold. (37:55) This structure allows them to capture the upside of a higher priced economy without the burden of rising raw material costs or significant capital expenditures. Furthermore, their dominant position in a global duopoly provides them with significant pricing power and the ability to maintain 60% operating margins even during periods of economic stress. (38:20) While the US remains the most mature market for the company, its trajectory through 2030 will be increasingly defined by higher volume growth in its international segment, most notably in emerging markets in Asia, the Middle East, Africa, and Latin America. Visa is benefiting from the global shift from cash to digital transactions. (38:41) Believe it or not, today there is more than 11 trillion in consumer spending still happening in cash or checks. And Visa is well positioned to benefit from more of that spending transitioning to digital. This shift is being driven by the convenience of digital payments, the growth of e-commerce, and the rapid adoption of smartphones and internet access worldwide. (39:00) As the global economy shifts further towards digital storefronts, Visa stands as a primary beneficiary because e-commerce transactions are almost exclusively electronic, eliminating cash from the equation entirely. But looking towards 2030, a more radical shift is occurring with the rise of agentic commerce where autonomous AI agents navigate the web to negotiate and execute purchases on our behalf. (39:26) For this to really work, these AI agents require a secure programmable identity to authorize payments without a person being present for every click. Visa is positioning its network to be the underlying trust layer for these machines, ensuring that an AI can hand over digital credentials that are just as secure as a physical card swipe. (39:49) This essentially transforms Visa from a tool used by people into an invisible financial operating system for the entire AI economy by building these machine-to-achine rails. Now, Visa is ensuring it remains the toll collector even when a human is not involved in the transaction. Governments and financial institutions are also encouraging electronic payments to reduce tax evasion, improve transparency, and lower the costs associated with handling physical cash. (40:21) When considering the growth in spending, inflation, and this mega trend towards digitization, Visa is expected to capture around 9 to 10% topline revenue growth for the foreseeable future. And you can already see that in the numbers today. Over the past five years, which excludes 2020 since that's really an anomaly, revenue grew by 13 a.5% on average over that time period, and each year was around 10 to 11% growth. (40:46) But 2022 was also a bit of an exception because they had a post-pandemic rebound in global travel and crossber spending. Their value added services segment is also a key area for future growth. Visa shared in their investors presentation that the broader value added opportunity could be north of $500 billion annually for just this segment. (41:12) As payments are becoming more complex globally, demand continues to rise for services that enhance security, support the continued digital transformation, and meet evolving merchant and consumer expectations. So as digital payments continue to grow worldwide and businesses look for integrated solutions, value added services is a key growth engine that could help generate strong returns for shareholders. (41:32) When we consider the secular growth for the core business and then layer on value added services and their new flow segment, Visa should be growing their top line in the low double digits, perhaps 11 or 12% and grow their bottom line earnings per share by around 15% after factoring in operating leverage and share buybacks. (41:51) Share buybacks don't effectively grow the business, but they do grow earnings per share due to the lower share count that occurs over time. Visa has historically traded at an elevated valuation level and as long as their moat remains intact and there aren't any unexpected structural changes to the industry, I believe the elevated multiple is justified due to its dominant market position in the durability of the business. (42:15) Not many companies can continue to grow earnings in double digits year after year and do so with relatively low risk. When we look back over the past decade, Visa's PE ratio has been around 30 or so. From time to time, we've seen this metric dip below 30, but usually it's been short-lived, either because the earnings continue to march upward or because the market re-raised the stock higher. (42:40) Today, the PE multiple trades at around 32 with a $330 share price. For investors interested in adding shares of Visa to their portfolio, I could foresee two ways to get exposure. First is to view today's price as fair and not try to time the market and just let the compounding process start to work for you immediately. But you also have to accept the potential for a multiple contraction. (43:03) If in 5 years the business continues to execute, but the earnings multiple rerates from 32 to 27, for example, then you won't lose money as an investor, but you may have been better off allocating your capital elsewhere where you didn't see this multiple contraction. (43:22) For example, investors who purchased shares of Visa in 2021, they were paying north of 45 times earnings as everyone was excited about the structural shift from the analog world to the digital world. But shares of Visa underperformed the broader market since that time frame because the shares were overpriced with the benefit of hindsight. (43:40) Of course, the alternative would have been to patiently wait for the market to give you an even better price. As I mentioned earlier, shares of Visa have occasionally traded below 30 times earnings. So waiting for a better price can help minimize the risk of a multiple contraction in the future, increasing the odds of getting a return of say 10% or more. (43:59) The other consideration in purchasing a company like Visa is the holding period. If you potentially need to sell shares within the next 2 or 3 years, then that can increase your risk as an investor because the market can just do some crazy things in a short period of time. The longer your holding period when holding highquality companies, the lower your risk because time is on your side as the intrinsic value of the company grows year after year. (44:25) When we look at the share price of Visa, you can clearly see that this is a compounding machine. The underlying business continues to increase as the earnings per share increase pretty much every year. and the increasing earnings acts like a gravitational force that lifts the share prices higher over time despite any temporary headwinds or narratives the company faces. (44:46) When we look at the risks for a company like Visa, the main risk is the one that many of the best companies in the world face and that is a regulatory risk. The best companies experience regulatory risk because their business models are so good and their moes are so wide that it takes regulators to step in and try and prevent them from earning excess profits. (45:10) And the same goes for merchants as they do whatever they can to try and minimize the fees they're paying to the banks and to Visa and Mastercard. However, it seems to me that regulation might even be a source of competitive advantage as they've spent decades building relationships with regulators and securing the licenses needed to operate in nearly every major economy. (45:30) Although Visa doesn't disclose its total litigation fees, estimates suggest the company often spends hundreds of millions of dollars per year and in more contentious periods, that figure can climb to more than $1 billion annually when settlements and reserves are included. A major driver of these fees have been merchant antitrust and interchange fee lawsuits where Visa has repeatedly faced claims that its network rules unfairly inflate costs for retailers. (45:55) One high-profile example is the long-running US merchant interchange litigation, which ultimately resulted in a multi-billion dollar settlement and ongoing legal provisions, which highlights how regulation and litigation are persistent cost of doing business for Visa. (46:14) This regulatory pressure doesn't necessarily mean that Visa is price gouging, but rather its scale and market position naturally attracts scrutiny. Visa's fees are largely set as a percentage of transaction volume, meaning its profits grow alongside global commerce, not because it's arbitrarily raising prices. Regulators and merchants often focus on interchange fees because they're visible and widespread. (46:39) Even though Visa itself doesn't directly collect most of the fees in a single transaction, still when a network touches nearly every transaction in the economy, even small fees can look enormous in aggregate. That makes Visa an easy target during periods of political or economic stress. Although Visa's MO is in fact strong, it does face competitive pressure in different markets around the world. (47:03) For example, some governments have shown a preference for local payment networks which could keep Visa at a certain markets. In India, the government launched the unified payments interface which is a realtime system that moves money directly between bank accounts. We see something similar happening in Brazil where the central bank's payment system now accounts for nearly half of all payments in the country despite only launching in 2020. (47:29) And I haven't even mentioned China yet. Both Visa and Mastercard are practically non-existent in China as the statebacked network Union Pay holds a legal monopoly in China. China also took the leap by bypassing plastic cards entirely, opting instead in favor of super apps like Alip Pay and WeChat, which now control over 90% of the digital payments market in China. (47:59) Despite Visa's attempts to enter the Chinese market, it's largely kept out due to regulatory barriers. Europe has attempted to launch their own governmentbacked networks as well, but they've been less successful in rivaling both Visa and Mastercard at scale as Visa and Mastercard still process the vast majority of card transactions across Europe. So, in Visa's major, more mature markets, they are deeply entrenched and consumers overall benefit from using both Visa and Mastercard's networks. But even in the more mature markets, new solutions for payments are popping up and Visa is well aware of (48:33) this. One is the rise of accounttocount payments which let consumers pay someone through their bank account directly which bypasses Visa entirely. I actually didn't know that this was a real option for making payments. But it turns out that adoption has been slow in their more mature markets. (48:58) But if the user experience and technology around it improves, then that could pose a headwind for Visa. But again, we need to understand the incentives. If consumers earn rewards by swiping their card or simply use their Visa card out of habit, then why use another tool that doesn't offer such an incentive? But Visa is actually on top of the industry trends here as they're actively building their own rails for ADOA transactions which is called Visa Direct and they also acquired a company in Europe to further expand this offering. (49:29) Since government-backed competitors offer these basic transfers for free, Visa monetizes these flows by layering on value added services like instant fraud screening and global interoperability that a local banktobank system just simply can't match. They've turned a commodity service into a premium one by adding these security protocols that consumers expect from a standard credit transaction. (49:55) and the idea of a new entrant just generally entering the space and competing directly with Visa and Mastercard. I think just generally it's just not going to happen. Companies like Apple, Google, Stripe, Square, and PayPal, they've all been involved in this payment space and their solutions are built on top of Visa and Mastercard's rails rather than competing headto-head to them. (50:20) I don't use Apple Pay too often, but I know a lot of people do. And Visa helps make the payment process through your phone just seamless and easy. So, if I happen to not have my wallet with me, or I just want to have the convenience of using Apple Pay, like I'm taking the subway in New York, for example, it's it is a nice option to have. (50:41) And then Visa has also enabled other convenient options to make payments such as tap to phone and payments based on QR codes. Just prior to recording this episode, Visa also released their Q1206 earnings report and that actually ended at the end of 2025. So that's a fiscal year Q1 2026. The company continued to showcase strong operating performance. Revenues were up 15%. (51:04) Non-GAAP earnings were up 15% as well. And during the quarter, the company generated $6.7 billion from operating activities. And just 370 million was deployed into capital expenditures. And that illustrates what I was talking about earlier, how this is a very capital-like business. (51:26) And this has allowed them to send the vast majority of their cash flow back to shareholders in the form of buybacks and dividends. The company also provided guidance for fiscal year 2026 for both net revenue growth and earnings per share growth. They forecast this to increase in the low double digits. Given the operating leverage I highlighted earlier, I personally would expect earnings to grow faster than revenue. (51:44) But I think this illustrates that Visa is doing some reinvestment through the income statement in developing new offerings, enhancing their current offerings, and you just don't find a lot of companies that can grow at a double-digit clip in a relatively low risk way like this. So, of course, every company has its fair share of risks, and there are no 100% certainties, but we do our best as value investors to find companies that offer attractive riskreward profiles and are trading at good prices. So, if you're an investor (52:15) who underwrites returns closer to 20%, then you might need to look elsewhere in the market. But if you're satisfied with say a 10% return, maybe closer to 15% in the bull case, then Visa might be a company worth considering. or perhaps you put it on your watch list and just wait for the next market panic. (52:33) Visa is one of those companies where it's certainly a great business, but the biggest problem is that the market already knows that. So, a lot has to go right to get solid returns from here. So, while covering Visa, I thought it'd also be a good opportunity to talk a little bit about one of their main competitors, American Express. I know I highlighted them a bit earlier. (52:52) So they operate the closed loop model and then Visa and Mastercard of course have the openloop model. Interestingly Berkshire Hathaway has American Express as their second largest position in their public equity portfolio. Bergkshire initiated a position in AMX in 1991. (53:14) This means they've been holding the stock for more than 35 years bringing the value of the position to over 50 billion. And similar to Visa and Mastercard, AMX's stock has performed quite well over the years, beating the market over about any time frame. While shares of American Express might seem more attractive on the surface, as they trade at a lower PE ratio, it's not really an applesto apples comparison since AMX is also in the business of extending credit. (53:38) So AMX acts both as a payment processor and a card issuer. So, they take on credit risk as consumers swipe their MX cards and take on loans. The card I use more than any other is actually the MX Blue Cash card. It gives me 3% back on groceries, online retail purchases, and gas, and then 1% back on most other purchases. (54:00) However, I wouldn't be able to get by with just my MX card. Occasionally, I'll go and shop at Costco. I prefer to get gas at Costco, but Costco only accepts Visa credit cards for instore purchases. So, that essentially forced me to sign up for their Costco anywhere Visa card, which I don't necessarily mind since the card gives 5% cash back on gas and 2% cash back in store. (54:25) And, you know, that helps me cover the cost of my annual Costco membership fee. AMX's primary focus is on premium cards for higher income individuals. The business was started all the way back in 1850 and they've really built a reputation for premium customer service, exclusive membership benefits, and a strong presence in the payments industry. Today, MX accounts for roughly 4% of credit cards in circulation in the US. (54:51) But since they target more affluent consumers who tend to swipe their cards more and make larger purchases, they account for around 20% of the total purchase volume among the major US card networks. Although AMX competes directly with Visa and Mastercard, its strategy is pretty different. (55:14) With their closed loop model, they intentionally focus on these more affluent consumers by issuing cards that require high annual fees. And that's designed to attract these consumers who spend more, prioritize luxury, travel, and these exclusive perks. and AMX users have around two times as high of incomes than the average American and spend twice as much on flights and accommodations on an annual basis. Although merchants might not like the higher fees that AMX charges on each transaction, it can still turn out to be a win for the merchant because if those consumers tend to spend more and enjoy using their MX card, then the bigger (55:46) shopping cart can more than make up for the additional fee that the merchant is paying. With this model, MX positions itself to benefit from higher transaction fees, more control, and a much closer relationship with its customers. (56:06) And since they issue the cards themselves, they not only earn fees on each transaction, but they also generate revenue from the annual fees on their higher-end cards and from interest on the balances for those cards. Despite charging some of the highest annual fees in the space, they are the top rated credit card company based on factors like customer satisfaction and trust. (56:26) And this has given them room to hike their annual fee significantly over the years as they update a card levels benefits every few years. So since 2019, the average fee per card has compounded at 12% peranom. And there are additional benefits of issuing cards to wealthier cohorts of society. These consumers tend not to change their spending habits as much even during the tougher economic conditions. (56:51) And they also have lower delinquency rates, meaning that when they acrew a balance on their credit cards, they're more likely to pay that balance off. And despite AMX being around for more than 175 years, there is still an opportunity to grow and expand its business. Today, over 75% of AMX's revenue comes from the US, which leaves room for them to grow internationally. (57:17) Over the past 10 years or so, management has taken steps to grow outside the US. And the primary challenge was just gaining the merchant acceptance. And they have managed to gain traction as there's around 80% acceptance in their top international markets and more than 90% acceptance in top tourist attraction areas. Similar to Visa and Mastercard, AMX also sees the benefits of operating leverage. (57:43) Since 2020, AMX has increased its number of cards issued on average by 6% per year, which now totals 152 million cards issued, generating $1.6 6 trillion in payment volume. While revenues have grown at 8% over the past decade, earnings per share grew at nearly 12%. AMX expects the credit card payment industry to grow at around 8 to 9% per year through 2034. (58:09) And they're confident that thanks to its favorable positioning, they'll be able to grow revenue at a double-digit rate, outpacing the broader industry. However, with all that said, with AMX issuing the credit cards themselves, they operate in just a brutally competitive industry, as there are several companies marketing to consumers, trying to capture their attention and issue them cards. (58:29) It seems that half the time when I check out at a local retailer, I get asked if I'd like to get a credit card there, whether that be a sports retailer or just when I'm shopping for clothes. So AMX's advantage comes from that closed loop model of likely having the ability to offer the widest breadth of rewards and from their brand name that's globally recognizable. (58:52) It's trusted and it's associated with prestige and exclusivity in many people's minds. Overall, I would expect all three of the payments giants to continue to perform well as the world continues to shift toward digital payments. All three benefit from this secular tailwind and shareholders also benefit from the prudence of management, the benefits of operating leverage and they see their share ownership continued to increase through share repurchase programs. To wrap up the discussion, Visa just checks all of the boxes for me (59:27) as an investor. The business is wellrun. It has high returns on capital, generates recurring revenues that increase alongside inflation. They have minimal need for reinvestment and it's riding these big secular mega trends. However, the market recognizes the advantageous position they're in. (59:46) So, the stock is close to priced to perfection. It's not a stock to get rich quickly on, but assuming that their entrenched position doesn't significantly change, then I would expect it to continue to compound at a good rate going forward. That wraps up today's discussion on Visa and the payments companies. (1:00:04) Thanks a lot for tuning in and I hope to see you again next week. Thanks for listening to TIP. Visit the investorspodcast.com for show notes [music] and educational resources. This podcast is forformational and entertainment purposes only and does not provide financial, investment, [music] tax or legal advice. (1:00:21) The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. (1:00:38) Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the investors [music] podcast network may hold positions in securities discussed and may change those positions at any time without notice. [music] References to any third party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them. [music] Copyright by the Investors Podcast Network. (1:00:56) All rights reserved. Their culture of being highly focused on reducing costs and increasing the level of automation has created a strong competitive advantage that is just really difficult to replicate. Now the question is how long will interactive brokers be able to grow. Pedy has shared that he sees strong potential for growth both in the US and internationally. (1:01:23) Today around 34s of the revenue does come from the US and Pedy sees the number of accounts growing substantially well into the future. So right now they have their sites set on reaching 20 million accounts up from four million today. But they certainly don't intend to stop