I'm here to wave the flag for payment network company Visa (V 0.63%). Some investors may think it's been around forever and operates more as a value stock. But the company's only been public since 2008, and it's still got a lot of juice left for growth investors.
The company recently reported earnings results for its fiscal 2022 first quarter (ending Dec. 31, 2021). Those results show this fintech powerhouse is a work in progress and more growth is in the works. Here's why Visa deserves a place on your stock watchlist.
A textbook example of network effects
Visa's primary business is its payments network. This network allows you to swipe your Visa-branded credit card to pay for a product. That swipe triggers the payment terminal to talk to the financial institution funding that card. The terminal requests the money and the institution approves or declines the payment for the product.
All of that secured communication happens on a network that Visa owns, maintains, and more often than not it functions accurately and efficiently. For this valuable service, Visa charges a small percentage of each transaction as payment.
Visa's network is the largest globally, owning an estimated 50% market share of all payment cards. It has approximately 3.8 billion active cards in use, which means that merchants who want to get the business of these users need to be on Visa's network. Visa's dominance creates a network effect, where its leverage with merchants becomes more powerful as more people use its network.
Growth with stellar financials
Visa's grown revenue at an average of 10% per year over the past decade. Its business did take a big hit in 2020 when pandemic lockdowns affected several areas of spending, including travel and cross-border commerce.
Visa's fiscal 2022 first quarter showed that the business is getting back on track. Despite the spread of the omicron variant, Visa saw total transactions grow 19% year over year, and cross-border volume increased 37%. Revenue rose 24% year over year as a result. Analysts think this momentum will continue, forecasting 17% revenue growth for all of 2022 and 14% growth in 2023. 2020 was just a speed bump in what has been a multi-year march forward of growth.
Several long-term trends also point to further growth for Visa. Cash still makes up about a fifth of total payments in the United States, and likely more in emerging markets where banking isn't as developed. Visa's total payment card count grew 10% year over year in Q1 2022, so its growth is not only a rebound from lockdowns; more people are getting Visa payment cards into their wallets.
Perhaps Visa's profitability is the company's most impressive trait. Its payment network doesn't require nearly as much investment, allowing for growing revenue but also growing profits. Visa generated $24.1 billion in revenue over the past 12 months, resulting in $14.5 billion in free cash flow, a staggering 60% profit margin. It's one of the most free-cash-flow-efficient businesses that I've come across.
Visa uses this cash flow to pay a dividend (dividend yield is 0.6%), bolster its balance sheet (which has $14.7 billion in cash), and buy back stock to boost earnings-per-share (EPS) growth. Its EPS has grown an average of 16% annually over the past decade.
Keeping pace with the fintech and crypto spaces
Visa's dominance makes it hard for competitors to threaten its business. But there has been a rise in fintech companies in recent years, with many bringing new payment technologies into the mainstream (the Buy Now, Pay Later trend, for instance). Investors should keep an eye on these emerging threats and see how Visa management reacts. Management has shown a willingness to evolve to keep up with potential competitors. It tried to acquire fintech company Plaid in 2020 for $5.3 billion, but the two parties canceled it after the deal came under pressure from antitrust regulators.
Visa is making some moves to embrace cryptocurrency as it becomes more popular with consumers. It has crypto-linked payment cards which handled $2.5 billion in transaction volume in Q1 of fiscal 2022. Visa has also invested in other areas of crypto, like application programming interfaces (APIs) for developers to link applications to its payment network. It's encouraging to see a company that's arguably at the top of its industry being proactive in protecting and expanding on an already-dominant business.
The stock trades at a price-to-earnings ratio of 38.5, which isn't cheap. However, Warren Buffett once said that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Visa's averaged a P/E ratio of 32 over the past decade, so it seems that the market recognizes the company's strong fundamentals.
Visa's continued performance seems to justify its premium valuation. If investors don't feel comfortable paying a high price, they could use a dollar-cost averaging strategy to slowly build a position, and add more on any market dips.