We Study Billionaires - The Investor’s Podcast Network - TIP791: Best Quality Stock Idea Q1 2026 w/ Clay Finck

Starting point is 00:00:00 You're listening to TIP. Each quarter in our best quality ideas series, we break down a quality stock, its business model, competitive advantages, valuation, and more. For this quarter, we'll be breaking down Visa. Visa is a company that is widely known, but is likely widely misunderstood by many consumers. The company started in 1958 by literally handing out credit cards to unsuspecting residents in Fresno, California. and today the brand has become ubiquitous, processing more than $16 trillion in volume per year.

Starting point is 00:00:35 Interestingly, the stock is held by several super investors, including Chris Hone, Dev Contasaria, and Chuck Ackrey. And some of these super investors have owned Visa for more than a decade. Since Visa's IPO in 2008, the stock has compounded at roughly 18.8% per year versus the S&P 500's 11.8% over that same time period. In this episode, we'll cover how Visa fits into Dev Contasaria's investing strategy, Visa's role as an information network that avoids all card issuance and lending risk, the history of how Visa became the giant ubiquitous network we all know of today, an analysis of Visa's pristine financial profile,

Starting point is 00:01:15 featuring 60% operating margins in low capital intensity, a side-by-side comparison of Visa versus its primary competitors, MasterCard, and American Express, a look at the valuation level, the primary risks, and much more. One more quick note before we get into the episode. As we near the Berkshire meeting in May, we'll be hosting a few dinners and socials for our TIP Mastermind community in Omaha. Our events will be a great opportunity to meet kindred spirits in the value-investing

Starting point is 00:01:44 space, build meaningful relationships, and discuss stock ideas and investing strategies. We'll be closing the group to new applicants at the end of March, so if you'd like to join us in Omaha, you can apply to join the community. by visiting the Investorspodcast.com slash mastermind or simply shooting me a note on LinkedIn. So with that, I bring you today's episode on Visa. Since 2014 and through more than 190 million downloads, we break down the principles of value investing and sit down with some of the world's best asset managers. We uncover potential opportunities in the market and explore the intersection between money,

Starting point is 00:02:24 happiness and the art of living a good life. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your host, Clay Fink. Hey, everybody, welcome back to The Investors Podcast. I'm your host, Clay Fink, 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

Starting point is 00:03:14 important investing lessons the hard way. 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 23, my co-host Stig Broderston and I were going back and forth on Alphabet. The business fundamentals looked great and the valuation looked compelling. And one of the things that Stig brought to my attention was that Lilu from Himalaya Capital was adding significantly to his position in Alphabet. Now, Lilu is, without a doubt, one of the great investors of our time.

Starting point is 00:03:53 So this is something worth considering when buying a company like Alphabet. Not only does Lelu look for limited downside when running such a constant, 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. 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.

Starting point is 00:04:32 Many listeners have been asking me to bring Dev Contasaria back onto the show as a guest. Contesaria'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. Chuck Ockrey'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, and most notably, Chris Hoan from TCI Fund Management, has an 18% position in Visa, and given that he manages north of $50 billion, this makes his visa

Starting point is 00:05:17 position worth $9.5 billion. Hoan is an investor worth following because he showcased compounded annual returns of more than 18% per annum for more than two decades. 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. 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

Starting point is 00:06:06 connecting every customer and every bank to the world. And as this network grows, it becomes ever harder to replicate, end quote. 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 Contesaria 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. One of the first things that Contesaria 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

Starting point is 00:06:48 interested in owning that company, regardless of the potential for growth that lies ahead. he would rather sacrifice growth to ensure that he isn't likely to lose money over the next decade. In my interview with Contasaria, he stated, we define quality as finding the perfect intersection between growth and predictability. You can have companies that are growing very fast, like a young software company, but you're not sure of where it's going to be in five or 10 years in terms of the market share or industry dynamics, or you can find a company that's extremely predictable. 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.

Starting point is 00:07:34 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. Lastly, Consisaria wants to purchase businesses that are capitalized, 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. 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.

Starting point is 00:08:13 That's one reason why many big tech companies don't fit as well into Consistaria'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 businesses like Meta and Alphabet, capital spending is not optional, but it's actually a 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.

Starting point is 00:08:59 Before we get into where Visa sits today, it's important to understand how the company came to be. The story of Visa began in 1958 with a bold, an 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 AmeriCard, the very first consumer credit card with a revolving credit feature. 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 and a purchase, they had to be paid up by a certain date.

Starting point is 00:09:48 But with revolving credit, which is how credit cards work today, essentially you're able to keep a balance and accrue 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. 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

Starting point is 00:10:21 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. In the early 1970s, Bank of the market card automated much of the process that needed to happen in a transaction, such as the authoritative 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, authorization times dropped from five 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,

Starting point is 00:11:09 and sounds exactly the same in every language, signaling their ambition for universal acceptance. 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 U.S. 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 needs to be developed that is integrated with every single one of the tourist banks and every single one of the merchants point-to-sale systems.

Starting point is 00:11:55 There also needs to be support for hundreds of languages and currencies and compliance with thousands of local laws and regulations. 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 $19.1 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

Starting point is 00:12:45 trillions of dollars in transactions every year. So Visa has recently been in the headlines due to President Trump urging U.S. lawmakers to pass legislation to limit credit card interest rates to 10 percent. Ironically, Visa's stock was down 6 percent in the days after they ended. announcement, but the irony is that credit card interest rates do not directly impact Visa's business because Visa doesn't lend money, 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.

Starting point is 00:13:34 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. 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. So in my view, it's a classic example of the market acting irrationally based on investor's sentiment. Even if the

Starting point is 00:14:21 fundamentals haven't materially changed, the market can move stock prices and directions that just don't exactly make sense. 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. 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. 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.

Starting point is 00:15:07 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 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 cardholders, 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. It would be incredibly difficult to build the network

Starting point is 00:15:47 that they have built and steal market share for them. But as I'll touch on at the end, there are a few potential threats in cases of competitors gaining a dominant position in different markets globally. 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 One, or Barclays. Visa, on the other hand, operates as the payment network that operates behind the scenes. 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. So first I'll mention that there are five parties involved in every digital transaction.

Starting point is 00:16:34 Let's say you walk into your local Chipotle, order your bowl with chicken and guack, 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. 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 JPMorgan Chase. That party, we can call the issuing bank, and then we have Chipotle's bank, which in this case, we can just say a city group in this example. And then lastly, we have Visa.

Starting point is 00:17:11 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. 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. 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.

Starting point is 00:18:10 American Express is a bit of a different conversation, but they operate what we can refer to as a closed loop network. 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

Starting point is 00:18:39 that consumers are accustomed to using. So it's a bit of a chicken and an egg problem. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency

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Starting point is 00:23:06 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. 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 0.1% or 0.2%. 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.

Starting point is 00:23:55 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 pays me 5% cash back on that purchase. So I'm going to get my gas. getting $5 in rewards. I'm not sure what the agreement is between Visa and Costco, but perhaps they're getting 0.1% 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. And to help put their scale into perspective, 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.

Starting point is 00:24:45 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 of 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. 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.

Starting point is 00:25:22 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. What's also really important is that Visa operates globally, and they've received higher fees through cross-border transactions. So the last time I left the U.S. was back in 2021 when I visited my co-host, Stig Broderson, 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. In times like this, when you're exploring a foreign city, you don't know well. Visa can sometimes feel like a savings grace.

Starting point is 00:26:09 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. 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

Starting point is 00:26:39 egregious fees, and hoping that I don't misjudge the amount of cash that I would need. 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. In cross-border transactions are actually quite an integral part of Visa's business. Because of the increased complexity, risk, and the currency exchange involved in cross-border transactions, Visa is able to capture a higher fee than a domestic transaction. It tends to be around three times higher. Despite cross-border transactions making up just 10% of Visa's payment volume, they account

Starting point is 00:27:18 for more than one-third of revenue. 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. 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 the Visa and MasterCard. And because Amex, the history is 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. While Amex's rewards are pretty attractive, they're financed by these higher merchant costs. So it's a

Starting point is 00:28:07 strategy that works for luxury travel, but it struggles to compete with the low-cost, high-volume utility model that Visa and MasterCard provide for everyday essentials. Additionally, Visa and MasterCard's open-loop 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's share of the overall market. So when we exclude China, Visa is estimated to have around 60% in the market.

Starting point is 00:28:46 MasterCard is estimated to be at around 25%, and American Express is just over 10%. While Amex 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. So by positioning itself as a status-driven club rather than a basic utility, Amex 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 AMX cardholder. And when we look at the banks involved, they also have an incentive to work with players like Visa

Starting point is 00:29:28 and MasterCard. So one of Visa's most popular cards is J.P. Morgan Chase Sapphire card. J.P. 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. 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,

Starting point is 00:30:24 peer-to-peer transfers, and government disbursements. 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 one-fourth of their business. 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.

Starting point is 00:31:16 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. What's also really interesting to me about Visa is how some investors view Visa and MasterCard essentially is one and the same. This perspective stems from the fact that both companies seemingly operate these identical

Starting point is 00:31:53 toll booth business models where they provide the underlying infrastructure for global payments, but they aren't taking the credit risk with the loans. 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. Visa is just the undisputed heavyweight. They're capturing around 60% of the market excluding China. MasterCard, as I mentioned, was at 25%.

Starting point is 00:32:33 Geographically, Visa is more dominant in the U.S., where it processes over double the volume of MasterCard. 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. 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 tradeoff

Starting point is 00:33:09 between Visa's sheer size and MasterCard's potential for slightly higher growth. 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. 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 return since the start,

Starting point is 00:33:56 of 2022, shares of Visa have actually outperformed, which also makes sense because MasterGard'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 industry, they're viewed as what we can refer to as a rational duopoly. The two players prioritized maintaining high industry margins rather than engaging in these destructive price wars. So instead of cutting fees to steal market share from the other, 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 security, the underlying

Starting point is 00:34:44 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%. And when you look at large cab 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. Around three-fourths of that is what you can think of as revenue generated from the fees

Starting point is 00:35:33 on transactions. However way you look at it, Visa's business has grown quite nicely for a very long time. The U.S. business is the more mature business for Visa, while the international business is growing faster due to card adoption catching up with the U.S., especially in emerging markets. Furthermore, the value-added services segment is growing faster than the core business. As in Q4 2025, it 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.

Starting point is 00:36:12 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. 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 is compounded as 17%. Since the growth in earnings per share can be a good proxy for the 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% per annum. So assuming

Starting point is 00:37:00 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. 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 CAPX line item. Visa invests heavily in its global transaction processing network VisaNet to ensure speed, reliability, and near-perfect uptime. This includes spending on data centers, servers, storage systems, and network equipment. And these investments allow VISA,

Starting point is 00:37:49 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. 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 Cantor Brands study on the most valuable global brands, Visa ranked number seven on the list in 2024. So Visa has obviously done a great job protecting the value of their brand, as the uptime for the Visa network is around 99.999%. With that said, the vast majority of the cash flow that Visa generates

Starting point is 00:38:38 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. 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. 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 the cost of the cost of income.

Starting point is 00:39:16 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. This structure allows them to capture the upside of a higher-price 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. While the U.S. remains the most mature market for the company,

Starting point is 00:40:06 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. 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, in the rapid adoption of smartphones and internet access worldwide.

Starting point is 00:40:45 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. For this to really work, these AI agents require a secure, programmable identity to authorize payments without a person being present for every click. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:44:36 these machines, ensuring that an AI can hand over digital credentials that are just as secure as a physical car swipe. By building these machine-to-machine 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. When considering the growth in spending, inflation, and this megatrend towards digitization, Visa is expected to capture around 9 to 10% top-line revenue growth for the foreseeable future. And you can already see that in the numbers today.

Starting point is 00:45:20 Over the past five years, which excludes 2020, since that's really an anomaly, revenue grew by 13.5% on average over that time period, and each year was around 10 to 11%. growth, but 2022 was also a bit of an exception because they had a post-pandemic rebound in global travel and cross-border spending. Their value-added services segment is also a key area for future growth. Visa shared in their investor's presentation that the broader value-added opportunity could be north of $500 billion annually for just this segment. As payments are becoming more complex globally, demand continues to rise for services that enhance security, support the

Starting point is 00:46:01 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. When we consider the secular growth for the core business and then layer-on value-added services and their new flow segment, FISA should be growing their top line in the low double digits, perhaps 11 or 12 percent, and growth. their bottom line earnings per share by around 15% after factoring in operating leverage in share bybacks. Share buybacks don't effectively grow the business, but they do grow earnings per share

Starting point is 00:46:43 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. 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-rates the stock higher. Today, the PE multiple trades at around 32, with a

Starting point is 00:47:29 $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. If in five years, the business continues to execute, but the earnings multiple re-rates from 32 to 27, for example, then you, you 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. For example, investors who purchased shares of Visa in 2021, they were paying north of 45 times

Starting point is 00:48:13 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, 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. The other consideration in purchasing a company like Visa is the holding period.

Starting point is 00:48:50 If you potentially need to sell shares within the next two or three 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 high-quality companies, the lower your risk because time is on your side as the intrinsic value of the company grows year after a year. 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

Starting point is 00:49:28 higher over time, despite any temporary headwinds or narratives the company faces. 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 modes are so wide that it takes regulators to step in and try and prevent them from earning excess profits. 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

Starting point is 00:50:13 economy. 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. One high-profile example is the long-running U.S. merchant interchange litigation, which ultimately resulted in a multi-billion dollar settlement and ongoing legal provisions, which highlights how regulation and litigation are persistent costs of doing business for Visa. This regulatory pressure doesn't necessarily

Starting point is 00:51:02 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, 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 moat is in fact strong, it does face competitive pressure and

Starting point is 00:51:49 different markets around the world. For example, some governments have shown a preference for local payment networks, which could keep Visa out of certain markets. In India, the government launched the unified payments interface, which is a real-time 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. And I haven't even mentioned China yet. Both Visa and MasterCard are practically non-existent in China, as the state-backed 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 AliPay and WeChat,

Starting point is 00:52:40 which now control over 90% of the digital payments market in China. 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 government-backed 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 this. One is the rise of account-to-account payments, which let consumers pay someone through their

Starting point is 00:53:30 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, 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

Starting point is 00:54:08 own rails for A-to-A transactions, which is called Visa Direct. and they also acquired a company in Europe to further expand this offering. 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 bank-to-bank 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. And the idea of a new entrant, just generally entering the space

Starting point is 00:54:48 and competing directly with Visa and MasterCard, I think 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 head-to-head to them. 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. And then Visa has also enabled other

Starting point is 00:55:19 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 Q1-20206 earnings report, and that actually ended at the end of 2025. So that's the fiscal year Q1, 2026. The company continued to showcase strong operating performance. Revenues were up 15%. Non-Gap 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-light business. And this has allowed them to send the vast majority of their cash flow back to shareholders in the form of buybacks

Starting point is 00:56:05 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, 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 risk-reward

Starting point is 00:56:50 profiles and are trading at good prices. So if you're an investor 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 bowl 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. 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.

Starting point is 00:57:22 So while covering Visa, I thought it would also be a good opportunity to talk a little bit about one of their main competitors, American Express. They operate the closed loop model, and then Visa and MasterCard, of course, have the open loop model. Interestingly, Berkshire Hathaway has American Express as their second largest position in their public equity portfolio. Berkshire initiated a position in Amex in 1991. This means they've been holding the stock for more than 35 years, bringing the value of the position to over 50 billion.

Starting point is 00:57:53 And similar to Visa and MasterCard, Amex'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 traded a lower PE ratio, it's not really an apples-to-apples comparison since Amex is also in the business of extending credit. So Amex acts both as a payment processor and a card issuer, so they take on credit risk as consumers swipe their Amex cards and take on loans. The card I use more than any other is actually the Amex Blue Cash card. It gives me 3% back on groceries, online retail purchases, and gas, and then 1% back on most other purchases. However, I wouldn't be able to get by with just my Amex card.

Starting point is 00:58:39 Occasionally, I'll go and shop at Costco. I prefer to get gas at Costco, but Costco only accepts Visa credit cards for in-store 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% of it. cash back in store, and that helps me cover the cost of my annual Costco membership fee. Amex'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,

Starting point is 00:59:21 Amex accounts for roughly 4% of credit cards in circulation in the U.S., 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 U.S. card networks. Although Amex competes directly with Visa and MasterCard, its strategy is pretty different. 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 Amex 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

Starting point is 01:00:09 might not like the higher fees that Amex 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 Amex card, then the bigger 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. 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

Starting point is 01:00:53 company based on factors like customer satisfaction and trust. 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% per annum. 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, and they also have lower delinquency rates, meaning that when they accrue a balance on their credit cards, they're more likely to pay that balance off.

Starting point is 01:01:33 And despite Amex being around for more than 175 years, there is still an opportunity to grow and expand its business. Today, over 75% of Amex's revenue comes from the U.S., which leaves room. for them to grow internationally. Over the past 10 years or so, management has taken steps to grow outside the U.S. 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, Amex also sees the benefits of operating leverage. Since 2020, Amex has the benefits of operating leverage.

Starting point is 01:02:15 Since 2020, Amex has increased its number of cards issued on average by 6% per year, which now totals 152 million cards issued, generating $1.6 trillion in payment volume. While revenues have grown at 8% over the past decade, earnings per share grew at nearly 12%. Amex expects the credit card payment industry to grow at around 8% to 9% per year through 2034, 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 Amex issuing the credit cards themselves, they operate in just a brutally competitive industry

Starting point is 01:02:56 as there are several companies marketing to consumers trying to capture their attention and issue them cards. 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 Amex'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, 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.

Starting point is 01:03:43 up the discussion, Visa just checks all of the boxes for me as an investor. The business is well run. 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 megatrends. However, the market recognizes the advantageous position they're in, 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. Thanks a lot for tuning in, and I hope to see you again next week. Thanks for listening to TIP.

Starting point is 01:04:28 Follow We Study Billionaires on your favorite podcast app and visit the investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. 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. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in

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