If you're looking for great stocks to add to your portfolio, a worthwhile strategy is to look at past winners. This is a smart idea because companies that have found sustainable success in prior years might be well positioned to continue this performance going forward, thanks to superior product or service offerings, powerful competitive advantages, and solid growth prospects.
Over the past five years, shares in Visa (V -0.23%) have climbed 89%, a better return than the gains registered by the S&P 500 and the Nasdaq Composite Index. This business has clearly been a major winner in the past. But while historical returns are no indication of what the future holds, here's why Visa can be a long-term winner.
Tremendous history of success
Over the past five years, Visa has produced outstanding results. Its revenue and diluted earnings per share have increased at compound annual rates of 9.8% and 20.1%, respectively. As a result of a business model that scales extremely well, the net income margin went from 36% in fiscal 2017 to 51% last fiscal year. And during this time, from 2017 to 2022, total payment volume on the network soared from $10.2 trillion to $14.1 trillion. As of Dec. 31, there are 4.1 billion Visa-branded cards in circulation, demonstrative of the company's ubiquity.
Despite ongoing macroeconomic headwinds, Visa's momentum carried over into its fiscal 2023 first quarter, which ended Dec. 31. Net revenue of $7.9 billion was up 12% year over year. Total payment volume increased 7% to $3 trillion. And because demand for travel continues its strong recovery, international transaction revenue jumped 29%.
Indicative of the company's superb financial profile, Visa was able to produce more than $3.9 billion of free cash flow last year, allowing it to generously reward shareholders in the form of stock buybacks and dividends. This is nothing new for the company, and it helps explain why the stock has done so well.
Positioned for future gains
As I noted before, just because a company was successful in the past doesn't necessarily mean the future will be as bright. However, for some businesses, better days are on the horizon, as is the case for Visa. I think there are three overarching reasons that investors have a lot to be optimistic about.
According to the Pew Research Center, about 41% of Americans usually don't use cash for any of their transactions during the week, up from 24% in 2015. Even in many developing countries, cash is still the primary method of payment. As the largest card network in the world, Visa is spearheading the shift to a more cashless society, something that will still take a long time. Broad secular trends can be a wonderful thing for a business, and the move to digital payments is one of the most prominent shifts happening across the world.
Visa wouldn't be able to keep thriving without its powerful economic moat, the most important being its network effects. As I stated earlier, there are 4.1 billion Visa cards outstanding. And these cards are accepted at more than 100 million merchant locations. This creates a gargantuan network where more cards attract more merchants and vice versa. Having a critical competitive advantage like this that insulates it from rivals will keep Visa in a favorable position for years to come.
And lastly, investors should look at Visa's valuation. As of this writing, shares are trading at a price-to-earnings (P/E) ratio of 32, which is below the average for the past five years. What's more, Visa's valuation is cheaper than its main competitor, Mastercard, a stock that sells at a P/E multiple of nearly 36 today, although both are outstanding businesses.
A remarkable history of success, coupled with compelling reasons for why it should continue, gives me confidence that Visa can be a long-term winner.
