You'd be hard-pressed to find someone who doesn't consider Warren Buffett one of the greatest investors ever. His track record speaks for itself, and with that success, there can be an urge for investors to mimic how Buffett selects Berkshire Hathaway's holdings to replicate a bit of his success.
One company, in particular, has caught my eye despite valuation concerns from some investors. As of Sept. 6, Visa's (V -0.51%) 52-week high is just under $249, and the company is trading around $247.
The stock is fairly expensive by most standards, but the reason it's a no-brainer buy comes down to this one Buffett quote: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
What makes a company wonderful?
Few investors would argue against Visa being a wonderful company, but what exactly makes it so? Well, let's first look at what makes a company wonderful in general, according to Buffett. It comes down to four things:
- A strong brand: A recognizable brand goes a long way with customer loyalty.
- Predictable earnings: Consistent and great cash flow is key for company planning.
- Good management: Bad leaders can stall a company's growth.
- Competitive moat: There should be a barrier that competitors can't easily overcome.
If a company has all four of those, it's an investment you can rarely go wrong with. Visa is no exception.
There's no stronger brand when it comes to payment cards and processing. It's Visa, a large gap, and then everyone else. The strong brand and market-leading position have made Visa a cash-printing machine with some of the highest margins you'll see from any company in any industry.
Data by YCharts.
Visa's management must also be recognized as it's maneuvered the company through changing trends such as contactless payments and digital wallets. The company has remained committed to growth while simultaneously returning capital to shareholders too. That's not an easy feat.
A competitive moat is a company's biggest advantage
Of the characteristics Buffett says make a great company, the competitive moat may be the most important because it's so directly tied to a company's chances of long-term success.
A strong brand can be challenged by a young upstart (think: Coca-Cola vs. Pepsi); predictable earnings can become a lot less predictable with a few missteps (think: Boeing); and good management must eventually change hands with no guarantee how future leaders will perform (think: General Electric).
A solid competitive moat reduces any potential vulnerability presented by the other three variables. In Visa's case, its competitive moat is its vast reach: 200-plus countries, 4.2 billion cards in circulation, and over 100 million merchant locations. For perspective, Mastercard, Visa's closest competitor, has around 2.8 billion cards in circulation and only around a third of the merchant locations.
Visa's reach has a lucrative network effect
Visa's competitive moat is the gift that'll keep giving when it comes to cards and payment processing, specifically acquiring new cardholders and merchants. If you're looking for a card, there's an incentive to go with Visa because you know you'll likely be able to use it anywhere that accepts cards. The same can't necessarily be said about a Mastercard, American Express, or Discover card.
For new merchants, there's an incentive to, at minimum, accept Visa because you know it's by far the most common type of card your potential customers will be using. Accepting cards but not accepting Visa could noticeably limit your customer base. It would also be a hassle for current Visa merchants to change their payment processor (switching equipment, updating systems, etc.), so many just won't consider it.
It's one thing to have a present-day competitive moat. It's a whole different ballgame when that moat has a network effect that compounds over time. Each additional cardholder or merchant on the network increases the value of that network for future cardholders and merchants, widening Visa's moat a little bit at a time.
If you're looking for a stock you can invest in and never worry about selling for the next couple decades or longer, look no further than Visa.
