Priced at nearly 29 times trailing 12-month earnings, shares of Visa (V -0.23%) can't quite be considered cheap ... on the surface.
When considering factors other than its recent earnings, however, this fintech name becomes a much more compelling investment prospect. Indeed, the well-rounded outfit deserves a place in far more people's portfolios, possibly including yours.
There are 3 reasons Visa stock is worth every penny
You're reading that right. Visa is a fintech stock. While its roots are those of a credit card middleman, it's evolved into so much more. Cryptocurrencies, data analytics, and non-card-based payment solutions are all in its wheelhouse.
But that's not the reason this stock priced at nearly 30 times its trailing per-share profits could be considered "cheap." Three other nuances actually make this superficially expensive stock a relative bargain.
The first of these three measures is raw growth -- past and projected. Last year's top and bottom lines were both up in excess of 20%, and while revenue growth slowed during the most recently completed quarter, the company's earnings growth kept on trucking at a clip of 21%. Analysts are collectively calling for sales growth of more than 10% this full year before accelerating to more than 11% next year, with earnings growth projected to top those paces.
The thing is, this degree of growth is simply more of the same for Visa.
V Revenue (Quarterly) data by YCharts
The second reason you're not paying quite as much as it seems to own a piece of Visa is the reliable health of its balance sheet and income statement.
Take the income statement as an example. Roughly half of its revenue is converted into income. That's huge. For comparison, the S&P 500's average net profit margin rate is closer to 11%, according to data from FactSet. At the same time, Visa doesn't have to exercise a great deal of leverage, meaning it doesn't have to take on a ton of debt to drive this degree of earnings. As of the end of last year, the $476 billion company is only servicing $20.5 billion worth of long-term debt. And, with roughly $15 billion worth of cash or cash equivalents in the bank right now, it could theoretically pay off the bulk of that debt if it chose to do so.
The point is, the bulk of what you're paying for when you buy shares of Visa is a net market value in the event of a liquidation or acquisition (not that either is on the radar). This isn't the case with lots of other stocks.
Finally, perhaps the top reason a price-to-earnings ratio of almost 30 isn't an outrageous valuation is the fact that you should expect to pay a bit of a premium for the sort of consistency Visa demonstrates.
Visa's annual top and bottom lines have been growing at a reliable double-digit pace for a while, and they should continue doing so for the foreseeable future. But the explanation and outlook understate just how consistent this company's growth is. Take a look at its sales and earnings going back for the past several years. With the exception of the pandemic-prompted disruption in 2020, Visa has been a fiscal juggernaut since going public in 2008.
V Revenue (Quarterly) data by YCharts
It wouldn't be out of line to suggest Visa has been one of the market's most consistent growers for the past decade, quadrupling its top and bottom lines during this timeframe. This sort of reliability, of course, merits above-average pricing.
Being stingy could cost you
Don't misunderstand. You may well be able to step into Visa shares at a lower valuation at some point in the future. It also never hurts to wait for marketwide weakness to temporarily drag a quality stock's price lower and jump in then.
As Robert Burton put it, though, let's not be penny-wise and pound-foolish. Visa shares typically command a seemingly premium price even when they're down. If you're waiting for a trailing price-to-earnings ratio of under 20, you're probably never going to see it -- we haven't seen this stock priced below a P/E of 25 in several years.
Bottom line? If you're interested in getting in, there's no particular upside to waiting. Given the stock's recent bullish action, in fact, waiting could prove a costly mistake.
