Fintech, as an investment category, has been climbing again after plummeting at the beginning of the bear market. It epitomized the cutting-edge technology and astronomical valuations that marked the previous bull market, which was a setup for a huge fall when it ended. But investors seem to think it's gone too far, and you can now find great deals on stocks that ultimately have incredible long-term potential and whose prices are looking very reasonable.
Visa (V 0.05%) might not be the first name you think of when you think of fintech, but it's an important player in the industry, and its stock might be cheaper than you think.
Moving the world's money
Visa is the largest credit card processing network in the world, powering more than 4 billion cards and processing more than $14 trillion in trailing-12-month payment volume.
Its core business model is fairly simple. It operates a credit card processing network that connects merchants with an issuing financial institution that provides the funds, typically a bank, and presents the transactions to be paid by the cardholder. Visa takes a fee from the merchant for every card swipe.
Visa's performance generally mirrors the economy, which is why it performs well an overwhelmingly large amount of the time. Its performance also tends to be cyclical, but up more than down. That's why it's seen as an evergreen stock to own, one that you can hold onto forever with a high likelihood of outperforming the market.
So far, it's been beating inflation. Inflation as an economic trend can benefit a company like Visa in its early stages since higher prices mean higher fees. Many companies have benefited from price hikes at the beginning, but as inflation persists and spending slows, the impact is starting to hit.
In the 2023 second fiscal quarter (ended March 31), revenue increased 11% over last year to $8 billion, and earnings per share (EPS) increased 20% to $2.03. Can Visa keep it up? It's already showing signs of deceleration, as the chart below shows, and the third quarter is likely to be much slower than the second.
Image source: Visa.
Even if it's hurt in the short run, though, the long-term story is intact.
A finger in every pie
So how is Visa, which began its credit card business in the 1950s, a fintech company?
It has embraced the digital revolution and spearheaded many technological innovations in digital payments technology. Your credit card today looks significantly different from your grandparents' cards, beginning with the embedded chip that allows for contactless payments.
It's not only the hardware, though. Visa has a broad assortment of digital services and capabilities, such as enabling electronic payments that don't require a physical card at all.
It has myriad global partners that it works with to facilitate its transactions and technology. Some examples of new partnerships are an expanded program with European fintech platform Adyen to offer its services to enterprise customers and a deal with the Standard Bank in South Africa to offer its enterprise Fleet cards.
It has also acquired an impressive array of smaller tech-oriented companies to beef up its services and provide more value for clients. These value-added services help clients such as Wells Fargo enhance the functionality it offers to its merchant client services. Value-added services increased by 20% in the second quarter.
A compelling valuation
Visa stock doesn't sport an objectively cheap valuation, trading at 30 times trailing-12-month earnings per share. To understand why it trades a premium, it make sense to consider Visa's profit margin. Historically, the margin has been unusually high, usually above 50%. When investors value it using a price-to-earnings ratio, they give it a premium for this attractive feature.
Although the price-to-earnings (P/E) is high, it's also well below Visa's five-year average.
Data source: YCharts Visa P/E Ratio
At this level, Visa looks like an excellent long-term buy.
