With a current market cap that exceeds $500 billion, Visa (V -0.23%) is a familiar company. The payments network facilitates cashless transactions across the globe for merchants and consumers. There might even be a Visa-branded credit card in your wallet right now.
Without a doubt, this financial stock has been a huge winner. In the last decade, it has climbed 392%, a gain that's beaten the S&P 500 by a wide margin. Investors might be eyeing the stock as a potential addition to their portfolios.
But don't buy Visa shares unless you know these three important aspects of the business first.
1. Generating revenue
Visa makes money any time one of its cards is swiped. Called an assessment fee, this generally equals a fixed amount of less than $0.02 plus 0.13% of a transaction's total.
While that figure seems tiny, it can result in huge amounts of money for Visa. The business processed a whopping $14.8 trillion in volume in fiscal 2023 (ended Sept. 30), and the company was able to rake in $32.7 billion in revenue.
It's worth pointing out a key distinction. Many people misunderstand how Visa makes money, believing that the business earns interchange fees. You'll likely hear this any time Visa is blamed for interchange fees that are too high.
However, these interchange fees, which make up the bulk of the amount that merchants are charged when they accept card payments, go to the issuing bank. This is the institution that approves borrowers, provides cards, and services the debt of its customers. Think of JPMorgan Chase or Capital One. By comparison, Visa takes only a small cut of a transaction.
Another way Visa generates revenue is through value-added services, like advisory, risk management, and acceptance solutions. These offerings generated $2.5 billion in sales in the last fiscal year, up 25% year over year.
These value-added services may not get the attention the core transaction-related platform gets, but management is continuing to focus on growing this other segment. It can further entrench Visa into the operations of its customer base.
2. Strong financial position
One of the most attractive qualities about this company is the profit it makes. In fiscal 2023, Visa made $21 billion of operating income, which translated to a ridiculous margin of 64%. You'd struggle to find any business with a better operating margin than this.
Moreover, Visa can produce tons of free cash flow (FCF), to the tune of $20 billion last fiscal year. This FCF was used mainly to repurchase the company's own stock. In the last decade, Visa has been able to shrink its outstanding share count by 21%.
How is this company in such a strong financial position? It's all about the lucrative business model.
The technological and communications infrastructure underpinning Visa's payments network is already built out. This means that any additional transaction it processes should carry extremely high margins.
3. Economic moat
As a two-sided platform that connects 100 million merchant locations with 4.2 billion cards in circulation, Visa benefits from network effects, a powerful source of economic moat. As the network gets bigger, it becomes more valuable to new and existing users.
Merchants have no choice but to accept Visa cards unless they want to alienate a massive customer base. And consumers who want to shop anywhere will likely be open to carrying a Visa-branded card in their wallets.
These network effects make the company's competitive positioning hard to disrupt. Good luck to any business trying to develop a rival to Visa from scratch. It seems like an impossible task.
Understanding how Visa makes money, appreciating its pristine financials, and knowing about its economic moat is key for investors looking to buy this financial stock today.
