Since its initial public offering in March 2008, Visa (V 0.77%) has trounced the S&P 500 by a wide margin. The leader in card payments has seen its share price soar 1,550% since that IPO, a much better return than the broader index's 231% gain over the same timeframe.
Considering this level of outperformance, it might be a pleasant surprise to learn that the stock trades at a trailing price-to-earnings ratio of 29.6. That current ratio is much cheaper than its five-year average.
So a high-performing stock appears to be available at a discounted price. That sounds like a buying opportunity. But before committing to buying shares, it's probably best to research this company a bit more and ensure Visa stock is the bargain it seems. Here are three things you need to know about Visa.
1. Visa isn't a lender
Visa is one of the largest financial stocks out there (especially as it relates to card payments), so some investors might assume that Visa operates like a traditional bank. This means taking in deposits or raising capital some other way, and then lending it to customers via credit cards.
But Visa doesn't lend money or approve borrowers for credit cards at all. It simply provides the communications network that connects a merchant's bank with a consumer's bank. The latter stakeholder, known as the issuing bank, is the one that provides the credit and/or backs the debit cards that customers transact with. These stakeholders are companies like JPMorgan Chase or Bank of America and they effectively employ Visa to manage this part of their business.
By not operating like a traditional bank, Visa benefits tremendously. It's not exposed to credit risk, making the business much less cyclical and far safer. Visa's capital also isn't tied up in loans, making it an asset-light entity. That's part of why Visa can manage free-cash-flow margins exceeding 65%.
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2. The details about interchange fees can be misleading
In a typical transaction, there are usually five main high-level parties involved: the consumer and their bank, the merchant and its bank, and Visa. The interchange fee, which might be about 2% of a transaction's value, is the biggest component that a merchant pays. And while most industry watchers believe that Visa receives this, it's actually the consumer's issuing bank that does.
And it makes sense why the issuing bank receives the largest fee share. A bank is marketing to find a customer, then approving them for credit, and then servicing that product. Essentially, it does all the work and takes all the risk.
All of the talk about regulating interchange fees in some way, whether by the Durbin Amendment in 2010 or the recently proposed Credit Card Competition Act of 2023, incorrectly puts the blame on a company like Visa. But Visa collects what's called an assessment fee, which is usually a fixed $0.02 plus 0.13% of a transaction dollar amount. That's a tiny figure when compared to the interchange.
Next time someone points to Visa as the reason why merchants are paying so much to accept card payments, remember that it's the issuing banks that are benefiting the most.
3. Visa has an incredible financial profile
A closer look at Visa can't be complete without focusing on the financials. In the past 10 years, revenue and net income rose at compound annual rates of 10.4% and 13.3%, respectively. Riding the broad secular trend away from cash and toward cashless transactions certainly helps.
And this is one of the most profitable enterprises on the face of the planet. Visa's operating margin exceeds 60%, indicative of how lucrative a business model it runs. Because every additional transaction that runs across its network carries almost zero marginal costs, Visa is able to post such a strong bottom line.
And because the tech infrastructure is already built out, capital requirements to grow the business are kept minimal. This helps explain why free cash flow is always so high. It's not hard to figure out that Visa is an outstanding business.
