Most investors would probably agree that Visa (V -0.45%) is one of the best businesses in the world. There are numerous reasons for this, which I’ll get to below, but the company’s favorable traits have resulted in huge gains for shareholders over the years.
If you invested $10,000 in this top financial stock 10 years ago in 2013, you’d have more than $51,000 today. The stock has produced an impressive gain of 411%, easily beating both the S&P 500 and Nasdaq Composite index by a wide margin.
Let’s take a closer look at this dominant card payments company and whether the stock makes for a smart buy right now.
One of the most obvious reasons that Visa is such an outstanding business is because of its track record of strong financial performance. This generally means key metrics have improved dramatically over time. In this case, revenue and diluted earnings per share have increased at compound annual rates of 11% and 24%, respectively, between fiscal 2012 and fiscal 2022. Investors should be encouraged by just how consistent this growth has been.
In the most recent quarter, Visa’s operating margin was 62%. And it generates enough free cash flow to return lots of capital back to shareholders. While the current dividend yield is just 0.75%, Visa has been able to reduce the outstanding share count by 19% in the past decade. This increases the ownership stake of existing investors.
Even during what has been an uncertain economic time, the business has posted double-digit revenue growth in the past nine quarters. And over the next five fiscal years, Wall Street expects sales to rise at an annualized pace of 11%.
Another factor that has contributed to Visa’s remarkable success is the presence of network effects, which create the company’s economic moat. At a high level, Visa sits in the middle of a two-sided payments network that connects 100 million merchant locations with 4.2 billion cards in circulation. The growth of any one of these groups immediately makes the network more valuable to existing and new stakeholders.
This is an extremely scalable business model that has resulted in the superb financials that I just discussed. Moreover, it makes Visa’s competitive position almost unassailable. Popular digital payments businesses like PayPal and Block have services that are built on top of Visa’s network. In fact, by helping propel the shift to electronic payments, these younger companies are probably benefiting the card networks because they make it even easier to transact without cash.
From an investor’s perspective, owning a business that is in such a strong position from a competitive standpoint not only reduces risk, but it also adds some peace of mind.
Should investors buy the stock?
The initial reaction from investors might simply be to buy Visa shares without hesitation. The company certainly might deserve a spot as a foundational holding in one’s portfolio based strictly on it having such a wide economic moat and its outstanding financial success. But because there is still a long runway for digital payments to continue taking share from cash transactions all over the world, Visa is in a lucrative position to keep benefiting.
To own a company that has such compelling qualitative characteristics, investors are being asked to pay a trailing price-to-earnings (P/E) ratio of 30.6. That’s below the trailing-10-year average P/E multiple of 33.6, but it doesn’t necessarily scream “bargain.” However, although the returns going forward might not resemble the past gains, it could still be a good idea to take a closer look at the stock.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, PayPal, and Visa. The Motley Fool recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.