Some stocks are winners as soon as they hit the market. Payment network company Visa (V -0.23%) came public in 2008 amid the financial crisis. Still, investors were up 50% two years after the IPO and much more today. Had someone invested $10,000 in the stock's IPO, that person would have a whopping $184,000 today, an 18-bagger in just 15 years.
Of course, you probably care more about whether the stock can continue multiplying over the next 15 years. It's a tricky question to answer as the stock marches toward its 52-week high.
Don't worry. Let's look at what to expect from Visa and reveal the company's secret sauce behind its impressive investment returns. Buckle up; it's going to be fun.
Is Visa the world's best business?
Visa is a payment network that connects your bank or credit card company to all the different merchants where you pay for stuff.
Imagine you're at your local Walmart and swipe your Visa-branded bank card to pay for groceries. The Walmart you swiped at must contact your bank to ensure you have the money to pay your bill. Your bank must also authorize Walmart to take the money from your account. You can think of payment networks like Visa as the messenger that runs these requests and authorizations back and forth. Visa takes a small percentage of the transaction as its fee for doing this legwork.
There are many banks and credit cards, but only a few major payment networks. In much of the developed world, Visa, Mastercard, American Express, and Discover are the four major networks you'll find at most merchants. However, Visa is the leader; roughly half of the credit cards in America use it. Visa's maintained this leadership position through powerful network effects. Competitors have difficulty matching Visa's footprint and competing on fees, keeping new competitors from entering this small circle of power players.
A track record of very profitable growth
Cash will probably never completely disappear, but digital payments are increasingly becoming standard. When I go to my favorite sports team's stadium, I can't use cash anymore. Visa's market-leading position has exposed the company to this big-picture shift away from cash.
Visa processed 192.5 billion transactions in 2022, a 17% increase over the prior year, showing that this trend is still alive and well. The company's profitability makes Visa stand out from most other stocks. The company is generating $17.7 billion in free cash flow on just $30.2 billion in revenue, a 58% conversion rate. That's a ton of cash for share repurchases, dividends, and the occasional acquisition.
V Revenue (TTM) data by YCharts
Perhaps the most underrated aspect of Visa is the growth built into the business model. Visa's percentage-based fee structure means payment volume will grow with inflation. Sure, a recession may temporarily affect it, but inflation will make it hard to stop Visa's long-term growth completely.
The future is bright, but what about the present?
Robust and profitable growth rarely comes cheap on Wall Street. Visa's price-to-earnings ratio (P/E) has averaged 34 over the past decade, a very high premium to the broader market -- the S&P 500 historically averages a P/E of 16 -- something few companies can continually justify.
Visa's stock has touched as low as a P/E of 23, but investors shouldn't hold their breath because it has only fallen below 30 occasionally. It's hard calling a stock cheap at these valuations, but any long-term investor can probably do well with dollar-cost averaging when the valuation is below its decade average.
V PE Ratio data by YCharts
Analysts believe the company will continue growing earnings per share (EPS) by an average of 15% annually over the next three to five years. At that growth, you could be better off owning shares long term than waiting for a perfect buying opportunity that might not come for years. If Visa does fall to a P/E around 25, investors can back up the truck for a great sale on an outstanding stock.
