Robinhood Markets operates an online, commission-free, stock-trading platform that has in many ways revolutionized stock trading with its ease and accessibility. Early on, its users got a bit of a reputation for showing an outsized interest in meme stocks and smaller, high-growth companies that tended to have volatile stocks.
But a look at the top 100 list of most popular holdings among Robinhood users right now shows the trading platform's users are interested in more than just meme stocks. Among the top trending stocks on the platform are a lot of big-name, blue-chip stocks including Amazon, JPMorgan Chase, and Berkshire Hathaway.
One blue-chip Robinhood stock that stands out in the top 100 is payment processor Visa (V -0.48%). It has already had a good run-up this year, trading up about 14% year to date, but unlike some other highfliers, Visa stock still has room to run. Here's why Visa should continue to beat the market.
Visa: A history of outperformance
If you are looking for a consistent, steady growth stock, you would have a hard time finding one better than Visa, the largest payment processor in the world. Over the past decade, Visa has not only crushed the market, but it has also performed well in all types of markets -- bear markets, bull markets, and everything in between.
It has posted a 10-year average annualized return of 17.6% as of July 10, while the S&P 500 has returned 10.3% on an annualized basis over that time. Going back 15 years to 2008, the year it went public, the gap is even wider as Visa has posted an average annualized return of 18.2% in the stretch, while the S&P 500 is at 8.7%.
Data by YCharts.
But when you look year by year, you see that Visa has been able to outperform in bad years, too. In 2022, when the market was down about 19%, Visa was only down 3%. And in 2016, when the market fell 4%, Visa was up about 16%. Over the past decade, as the world has gradually moved away from cash to digital payments, Visa has become much more of an all-weather stock than a pure growth stock that relies on market and economic cycles.
And the reasons that it has been such a strong performer are why it will continue to beat the market in the years ahead.
Built-in advantages
Visa has a couple of huge competitive advantages that should allow it to continue to dominate. The biggest edge is the duopoly it shares with Mastercard as some three-quarters of all credit/debit card transactions come through one of the two networks. But Visa is by far the largest, with some 53% of the total purchase volume coming through Visa. While there are other credit card companies, they have different business models and are much smaller. With its massive network, Visa has a moat that will be very hard to penetrate.
The other advantage is its business model by which most of its revenue is generated through swipe fees. Unlike other credit card processors which rely on membership fees or interest income on loans, Visa generates most of its revenue from fees every time a transaction is made on its network. There is no credit risk from loans and not a lot of overhead costs for branch offices or products. That, in turn, allows it to generate huge margins, with an operating margin of 67% and a profit margin of 51%. Those are huge numbers, and reflect, in the case of profit margin, the amount of profit after excluding all costs. Also, its return on equity, a measure of efficiency, is about 42%, which is about twice what is considered good for most companies.
The biggest threat to Visa has traditionally been a slow economy or recession; as consumer spending slows, so does its revenue. But with the continuing shift to digital payments, Visa has not been as affected by economic slowdowns, as revenue remained steady through last year's recessionary quarters, high inflation, and bear market.
Visa's advantages likely aren't going anywhere, and with payments increasingly going digital, Visa should continue to thrive for years. The attractive valuation it currently has with a forward price-to-earnings ratio of around 23 is a relatively low valuation for a company with this type of earnings power and stability. That's another reason why it is a pretty good bet that Visa will continue to beat the market over the long run.
