Visa at $354 is one of the highest-quality businesses you can own, and I hold it as a 5% position in my all-stock portfolio.

Trading at 32x trailing earnings with 11-12% revenue growth, 68% gross margins, and a near-impenetrable competitive moat, this is what a true compounding machine looks like.

As of December 30, 2025, Visa sits at a $630 billion market cap, having delivered a modest 10-12% return year-to-date while trading about 6% below its June 2025 all-time high of $375.

The stock has essentially traded sideways for six months as the market waits for proof that AI-driven commerce changes and alternative payment methods help rather than hurt Visa's toll-booth business model. That uncertainty creates the opportunity.

Here's the thesis that makes this a core holding:

Visa doesn't lend money, doesn't take credit risk, and doesn't hold deposits.

It operates a payments network that processed 67.7 billion transactions in fiscal Q4 2025 (ended September 30), charging a small fee on each one. The company generated $40 billion in fiscal 2025 revenue and $22.5 billion in non-GAAP net income - that's a 56% net margin.

When you have operating margins in the mid-60s and capital requirements measured in hundreds of millions rather than billions like a bank or manufacturer, the cash flow generation is almost absurd.

Visa generated $22.5 billion in free cash flow in fiscal 2025, which they used to repurchase $15.3 billion in stock and pay $5.1 billion in dividends, returning essentially 90% of free cash flow to shareholders.

The fiscal Q4 2025 results, reported October 28, showed exactly why this business model is so resilient even in choppy economic conditions.

These aren't explosive numbers that make headlines, but they don't need to be when you're compounding at this scale with these margins. Consistent low-double-digit growth with 60%+ margins and 100%+ free cash flow conversion creates enormous long-term value even if it's boring in any given quarter.

What caught my eye wasn't the top-line numbers but the acceleration in cross-border travel spending.

Cross-border volumes excluding intra-Europe transactions grew 15% year-over-year, driven by strong U.S. outbound travel to Europe and Asia and recovering international travel to the United States. This matters because cross-border transactions carry significantly higher take rates (fees as a percentage of transaction value) than domestic transactions - often 2-3x higher.

As global travel normalizes post-COVID and business travel recovers gradually, this becomes a tailwind that could add 200-300 basis points to revenue growth rates over the next few years.

The Business Model: Simple, Scalable, and Nearly Impossible to Disrupt

Let me break down exactly how Visa makes money, because understanding the economics is critical to understanding the moat.

Every time someone swipes a Visa card, taps their phone with a Visa credential, or clicks "buy" online using a Visa card, Visa takes a small cut - typically 1.5-2.5% of the transaction value, though the exact percentage varies by card type, merchant category, and geography.

That total fee is split between several parties: the issuing bank (the bank that gave you the card) takes the largest slice, the acquiring bank (the merchant's bank) takes a slice, the card network (Visa) takes a slice, and payment processors take a slice.

Visa's slice is actually smaller than most people think - often just 10-15 basis points (0.10-0.15% of transaction value), sometimes less for very large merchants who negotiate volume discounts.

But when you're processing $14.8 trillion in payment volume annually across 67+ billion transactions, those basis points add up extraordinarily fast.

What makes this business model truly extraordinary is the operating leverage. Once the network infrastructure is built - the data centers, fraud detection systems, authorization systems, global connectivity - incremental transactions cost Visa almost nothing to process. Adding a billion more transactions per quarter doesn't require proportionally more infrastructure, more sales people, more customer service reps, or more overhead.

The marginal cost of processing transaction number 67 billion is essentially zero. This is why gross margins sit at 68% and operating margins are in the mid-60s. Compare that to a bank that has to raise deposits, manage interest rate risk, provision for loan losses, and maintain branches. Or compare it to a fintech like Square or PayPal that has to acquire merchants one by one, provide working capital, and compete on price.

Visa does none of that. They just operate the network and collect the toll.

The competitive moat comes from three-sided network effects that are almost impossible to break.

Breaking into this three-sided network is functionally impossible without spending tens of billions of dollars over 10-20 years building parallel infrastructure and convincing all three sides to switch simultaneously. That's why only Mastercard competes at truly global scale, and why American Express and Discover remain niche players despite decades of trying to expand.

Why Visa Wins the AI Commerce Shift and Digital Evolution

The biggest question hanging over Visa - and the reason the stock has been dead money for six months despite strong fundamentals - is whether AI-powered shopping and alternative payment methods disrupt the business model. When AI agents start buying things on our behalf, does Visa still capture those transactions? When consumers use buy-now-pay-later services, real-time payment rails like FedNow, or account-to-account transfers, does Visa get cut out? These are legitimate concerns, and they're why the stock trades at 32x earnings instead of 40x+ like it did in 2021-2022.

The answer, based on Visa's strategic moves through 2025, appears to be yes - Visa will still capture these transactions, perhaps with even higher margins. Let me explain why through the specific initiatives Visa launched this year:

First is the Trusted Agent Protocol, an open framework Visa launched in October 2025 that helps merchants verify that AI shopping agents are legitimate and not malicious bots.

Visa reported that AI-driven traffic to U.S. retail sites surged 4,700% in 2025, creating a massive problem for retailers who can't distinguish between "my AI assistant buying groceries based on my preferences and budget" versus "a competitor's bot scraping prices" versus "a fraudster's bot testing stolen credit card numbers."

By providing the authentication and verification layer, Visa ensures that AI commerce flows through its existing rails. The AI agent might be placing the order, but it's still using a Visa credential stored in a digital wallet, and Visa still processes the transaction and takes its fee.

Second is Visa Intelligent Commerce, a new stack of tools and APIs launched throughout 2025 that allows AI agents to search, compare prices, and complete purchases securely using Visa's network. This includes AI-powered fraud detection and risk monitoring specifically designed for agent-driven commerce. In December 2025, Visa deepened this strategy with a partnership with Amazon Web Services, allowing enterprises to build AI shopping agents that integrate directly with Visa's payment infrastructure.

The key insight here is that Visa is positioning itself as the underlying payment layer regardless of interface. Whether a human clicks "buy" or an AI agent completes the purchase, Visa handles the actual money movement.

Third is the Visa Commercial Solutions Hub, a platform launched in late September 2025 that provides AI-powered payment tools for B2B transactions.

This is potentially huge because commercial payments - companies paying suppliers, managing expenses, processing invoices - is a $120+ trillion market globally, and only about 15-20% is currently digitized. The rest is still paper checks, wire transfers, and manual processes.

Visa is betting that AI will accelerate the shift from paper to digital in B2B payments because AI can automatically match invoices to purchase orders, detect anomalies, route approvals, and initiate payments based on business rules. Every transaction that shifts from a paper check to a Visa card or Visa Direct transfer is new revenue at very high margins.

Fourth is the Visa Direct stablecoin payouts capability launched in November 2025, allowing businesses to pay gig workers, creators, and contractors in USD-backed stablecoins. This isn't Visa becoming a crypto company; it's Visa providing the rails for faster settlement while still capturing transaction fees. A business can fund the payout in dollars, Visa converts it to stablecoin (likely USDC based on their partnership with Circle), sends it to the recipient's wallet, and charges a fee for the service.

Whether the transaction settles in fiat currency, stablecoins, or eventually central bank digital currencies, Visa wants to be the network layer facilitating the movement.

The Risks: Regulation and Disruption Are Real

Let me be very direct about the challenges facing Visa over the next 3-5 years, because the stock's sideways action in 2025 reflects genuine uncertainty about these risks.

The biggest risk is regulatory pressure on interchange fees and market structure.

The Department of Justice filed an antitrust lawsuit against Visa in 2025, alleging the company monopolizes the debit card market through exclusivity agreements with banks and merchants. The DOJ claims Visa's practices prevent competition from alternative payment methods and keep debit interchange fees artificially high. If the case results in forced divestitures, reduced interchange fees, or structural changes to how Visa contracts with banks, that directly impacts revenue.

A 10-15% reduction in U.S. debit interchange would reduce Visa's total revenue by 3-5%, which doesn't sound enormous, but would compress margins and slow growth meaningfully.

Separately, Visa and Mastercard settled multiple merchant lawsuits in 2025, including a $167.5 million settlement of an ATM fee case (Visa's portion was about $88 million) and ongoing negotiations on a broader swipe-fee case that major retailers like Walmart continue to challenge. The legal overhang is real, and any settlement that restructures how interchange works in the U.S. would be a negative catalyst.

Interchange fee reform has rare bipartisan support in Congress. Both Democrats (who see it as consumer protection) and Republicans (who see it as anti-competitive business practice) have introduced bills to reduce or regulate interchange. Political risk is difficult to quantify but it's real.

The second risk is alternative payment methods that bypass card networks entirely. Buy-now-pay-later services like Affirm, Klarna, and PayPal Pay in 4 allow consumers to split purchases into installments, often without using a credit card (they do ACH transfers directly from bank accounts).

Real-time payment networks like FedNow in the U.S., Pix in Brazil, and UPI in India allow instant account-to-account transfers at zero or minimal cost.

Crypto and stablecoins enable peer-to-peer payments without intermediaries. Venmo and Cash App process billions in transactions between individuals that used to be cash or checks. Each of these alternatives threatens to reduce card transaction volumes.

Visa's response has been to embrace rather than fight these alternatives.

Visa Direct can route payments to Venmo wallets, Cash App accounts, and even crypto exchanges. Visa cards are the most common funding source for BNPL purchases (even if the merchant doesn't see it as a card transaction, Visa still processes the initial funding). But if 10-15% of transaction volume shifts to alternatives over the next decade, that's a material headwind to growth.

Third is macroeconomic sensitivity that people often overlook when thinking about Visa. The business is directly tied to consumer spending and cross-border travel. In a recession where consumer spending drops 10-15%, Visa's payment volumes drop proportionally.

The 2020 COVID recession showed this clearly - Visa's payment volumes dropped 12% year-over-year in Q2 2020, and the stock fell 25% from peak to trough. Cross-border travel spending, which carries the highest margins, is particularly vulnerable to economic weakness or geopolitical disruptions.

If we enter a recession in 2026, Visa's revenue growth would likely go negative for 2-3 quarters, and the stock would probably trade down to $280-300 (about 25x forward earnings).

My Take: Should Be A Core Holding for Any Long-Term Portfolio

At $354, Visa trades at 32x trailing twelve-month earnings and about 28x forward fiscal 2026 earnings estimates of $12.50-13.00.

That's a premium to the S&P 500's 22x forward multiple, but Visa deserves a premium. You're paying for predictable 10-12% revenue growth, 60%+ operating margins, minimal capital requirements, 100%+ free cash flow conversion, and a business model that compounds cash flow at extraordinary rates with nearly zero reinvestment needs.

Let me put this in context.

A bank like JPMorgan trades at 12-14x earnings but has to constantly reinvest in branches, technology, and loss reserves.

A manufacturer like Caterpillar trades at 15x earnings but has to build factories and manage inventory.

A retailer like Walmart trades at 30x earnings but operates on 2-3% net margins.

Visa trades at 32x earnings with 56% net margins and throws off cash that it can't even reinvest productively, so it returns 90% to shareholders. Over the long term, that compounding machine is hard to compete with.

If you are investing in individual stocks, for conservative and growth portfolios alike, this should be a position. I'm at 5% in my all stock portfolio and very comfortable with that weighting.

My 24-month price target for December 2026 is $440, based on $13.50 in fiscal 2027 EPS and a 32-33x forward multiple.

That implies 20-25% upside plus the 0.8% dividend yield.

If the regulatory risks resolve favorably and cross-border travel continues recovering, there's upside to $480-500 (35x forward earnings).

If regulations impose meaningful fee reductions, downside is probably $300-320 (25x earnings), which still isn't catastrophic. The next catalyst is fiscal Q1 2026 earnings expected in late January 2026.

I'll be watching these metrics:

The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.