As part of our ongoing series, each week we typically conduct a DCF on one of the companies in our screens. This week, we’re analyzing a global payments giant that doesn’t often look “cheap” — but continues to compound value steadily over time — Visa Inc (V).
Profile
Visa Inc (V) is a global leader in digital payments, facilitating transactions between consumers, merchants, financial institutions, and governments across more than 200 countries. Unlike lenders, Visa does not take on credit risk, as it earns revenue primarily through transaction fees and value-added services tied to payment volumes. With a capital-light model, strong margins, and consistent free cash flow generation, Visa is widely considered one of the highest-quality compounders in the market.
DCF Analysis
Inputs
- Discount Rate: 10%
- Terminal Growth Rate: 3%
- WACC: 10%
Forecasted Free Cash Flows (FCFs) in billions
| Year | FCF (billions) | PV (billions) |
|---|---|---|
| 2025 | 18.0 | 16.36 |
| 2026 | 20.0 | 16.53 |
| 2027 | 22.5 | 16.91 |
| 2028 | 24.5 | 16.73 |
| 2029 | 27.0 | 16.76 |
Total Present Value of FCFs = 83.29 billion
Terminal Value Calculation
Using the perpetuity growth model:
Terminal Value = (FCF_2029 × (1 + g)) / (r – g)
= (27 × 1.03) / (0.10 – 0.03)
= 27.81 / 0.07
= 397.29 billion
Present Value of Terminal Value = 397.29 / (1.10)^5 = 246.36 billion
Enterprise Value Calculation
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value
= 83.29 + 246.36
= 329.65 billion
Net Debt Calculation
Net Debt = Debt – Cash
= 20.84 – 15.18
= 5.66 billion
Equity Value Calculation
Equity Value = Enterprise Value – Net Debt
= 329.65 – 5.66
= 323.99 billion
Per-Share DCF Value
Shares Outstanding = 1.941 billion
Per-Share DCF Value = 323.99 / 1.941 = $166.94
Conclusion
- DCF Value: $166.94
- Current Price: $340.38
- Margin of Safety: –51.0%
Based on this DCF valuation, Visa appears significantly overvalued. The calculated intrinsic value of $166.94 per share is well below the current market price of $340.38, resulting in a negative Margin of Safety of –51%.
While Visa is an exceptional business with strong fundamentals, investors should be aware they’re paying a premium for quality. Unless growth exceeds conservative estimates, the stock may already reflect much of its future value.
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