Legendary investor Warren Buffett and his company Berkshire Hathaway have long valued stocks that can build an economic moat, which is a competitive advantage that enables a company to achieve superior profit margins and pricing power. Few have been able to achieve a stronger moat than the largest payments rail in the world, Visa (V -0.48%). In fact, I think it's fair to say that Visa has built the ultimate moat. Here's why.
The largest payments network in the world
Consumers and businesses need to be able to efficiently move money back and forth, and Visa is arguably the single most important company in helping facilitate this.
Visa runs the most ubiquitous payment network in the world. It operates in more than 200 countries and is used by more than 100 million merchants. In 2021, total volume through Visa's network came in at more than $13 trillion. Furthermore, there are more than 3.8 billion Visa cards that have been issued all over the world. While Mastercard is another excellent stock that has built a strong payments network, the company saw much less total volume of $7.7 trillion come through its network in 2021 and has more than 2.5 billion cards in circulation.
Image source: Motley Fool.
Visa not only sets the rules for its network but also acts as the central player in all payment transactions that go through the network. In its core business, Visa facilitates the movement of money by authorizing transactions between the issuer and acquirer and also helps move funds between the two parties as well.
Image source: Visa.
Evaluating Visa and its moat is fairly easy. Given that it sets the rules for the largest payments network in the world, it certainly has pricing power -- not that it doesn't receive pushback from key participants in the network. But for every transaction that runs through its network, Visa collects a small fee, which is why many compare Visa to a tollbooth on the highway. Its excellent business has helped the company generate strong margins.
V Profit Margin data by YCharts
Furthermore, Visa will continue to benefit as the world continues to leave cash behind, a trend that has been accelerating due to the pandemic. For instance, in Latin America and the Caribbean, which Visa's management team has mentioned as an area seeing a lot of shifts toward digital payments, total volume across Visa debit and credit cards in the region came in at $1.07 trillion for the fiscal year 2022, up from $824 billion in the fiscal year 2021.
Visa is also a company that can do well during a high-inflation environment, like the one we're in now. First, a lot of costs to set up its payments network are fixed. Second, its fees are a percentage of a transaction, so if the cost of goods and services goes up, Visa simply makes more in fees. A recession could certainly lower consumer spending, which drives Visa's business, but so far the company hasn't felt any pain.
On its most recent earnings call, Visa's CEO Al Kelly said, "At this stage, in terms of volumes, we have seen no noticeable impact due to inflation, supply chain issues, or the war in Ukraine." Furthermore, Visa provided a strong outlook for the current quarter, despite taking a hit from suspending its operations in Russia.
Hard to replicate
Visa has all the makings of a great moat. It would be difficult and take lots of time for another company to set up a payments network with the same scale. The company has strong profit margins and lots of opportunities ahead as cash becomes less popular. It can also hedge inflation.
While there are certainly threats to its business, whether from blockchain technology, digital currencies, or new payment networks, Visa is big enough and has the resources to build similar technology and incorporate it into its network or acquire competitors or partner with them. The company has been very successful in the past at overcoming business threats. It is for all of these reasons that Buffett and Berkshire have owned the stock for many years.
