Rarely, if ever, should you make financial decisions blindly. This is especially true in stock investing where there's always a chance you could lose money with ill-advised choices. And while it's important to do your research before investing, there isn't a "right" or "wrong" way to do it, just different approaches.
One way to find stocks is from the top down, focusing on macroeconomic factors like sector and industry trends, economic conditions, and economic indicators. On the other hand, bottom-up investing begins at the company level, researching and analyzing the specifics of its business before zooming out and looking at the bigger picture.
Warren Buffett, who has achieved immense investing success via his company, Berkshire Hathaway, is known for his top-tier ability to analyze and know companies like the back of his hand. One company in the Berkshire portfolio, Visa (V 1.73%), stands out when taking the bottom-up approach.
NYSE: V
Key Data Points
Visa has impressive top- and bottom-line growth
A typical starting point when doing a bottom-up company analysis is a company's financial health. In Visa's case, it's about as strong as it gets.
Its business model is fairly straightforward: It collects various fees as part of every transaction on its payment network. As the world has progressed toward digital and cashless payments, Visa's top and bottom lines have benefited significantly.
In the fiscal 2023 third quarter (ended June 30), Visa reported $8.1 billion in revenue, up 12% year over year and up over 157% in the past decade. A testament to the company's operational efficiency is the fact that it has been able to grow its net income at a higher rate than revenue. Its third-quarter net income was up 22% year over year and 195% in the past decade.
Data by YCharts.
A beneficiary of the network effect
The key to Visa's growth is the ability to keep adding cardholders and merchants into its ecosystem, and thanks to the network effect, the company has extra help with growing its customer base. The network effect happens when a service or product becomes more valuable as more people use it.
Think about it this way: How many places can you think of that accept cards but don't accept Visa? For most people, the answer is none. Because of this reach, people are incentivized to go with a Visa card because they know it will likely be accepted anywhere that takes cards.
Merchants have a similar incentive. There are currently over 4.2 billion Visa cards worldwide, which is well over 1 billion more than the next highest, Mastercard. That's why merchants debating on which payment network(s) to accept have an incentive to go with Visa. Not doing so can drastically limit their potential customer base.
Visa's main competitive advantage is its reach, which only gets amplified with time, thanks to the network effect. A company with a competitive advantage -- especially one that's unlikely to change in the foreseeable future -- is a stable and promising investment.
Operational efficiencies
Getting to where Visa is today took many years of wise investments and a focus on growth. With physical products, a company incurs additional costs for each item it sells. With Visa, that's not the case.
Since a lot of its current infrastructure was built out in previous years, Visa has been capitalizing on increased transactions without spending too much in the present to make it happen. That's given the company a chance to operate with industry-leading margins.
Data by YCharts.
What's considered a "good" profit margin largely depends on the industry because cost of goods sold, operating expenses, and price points vary widely. However, it'd be difficult to find any company in any industry that's as profitable as Visa.
That leaves plenty of capital for Visa to expand its network, invest in new technologies, and continue providing good shareholder value, all of which lead to continued success for the company and its investors. Bottom-up investing may not be foolproof, but it provides a thorough understanding of a company's potential and risks -- and that's a powerful starting point for any investment decision.
