Visa (V -0.23%) finished 2023 with a 25% gain, which basically matched the performance of the broader S&P 500. However, the business probably flew under the radar because of all the attention that went to technology and artificial intelligence (AI)-focused companies. I think it's time to turn our attention back to this business.
Should investors buy this top financial stock hand over fist in 2024? Here are three reasons why this could be the smartest move you make this year, as well as one final factor to consider before making a decision.
1. Ongoing digitization of commerce
In the past decade, from fiscal 2013 through fiscal 2023 (ended Sept. 30, 2023), Visa's revenue increased at a compound annual rate of 10.7%. What's impressive is that this growth has been consistent, besides the single-digit decline in 2020 due to the pandemic.
Of course, Visa's gains have come on the backs of the rise of digital payments. The digitization of commerce and the ongoing decline in cash usage has propelled this business. And there's no reason to believe this secular trend is going to weaken anytime soon, especially in developing economies.
Even in the U.S., the Pew Research Center's data showed that 58% of Americans still use cash for some or all of their weekly transactions. To be clear, this was from 2022, but you get the idea that there is still a sizable runway for Visa in a developed economy like ours. This should result in strong revenue growth in the foreseeable future.
2. Network effects provide protection
A valid argument can be made that Visa's competitive position is essentially unassailable. The company benefits from powerful network effects that underpin its economic moat. As of Sept. 30, there were 4.3 billion Visa cards in circulation across the globe and some 130 million merchant locations that accept them as a method of payment. Both consumers and businesses have no choice but to be on Visa's network, which becomes more valuable the larger it gets.
It would be almost impossible for a new entrant to successfully launch a competing payments network. How would this company even begin to bring on merchants without any cardholders, or vice versa? It seems like a futile endeavor.
This all points to the dominance of Visa and just how entrenched it is in our economy. According to Statista, the business has a 61% share of card payments volume domestically.
3. Incredible financial position
Another reason to add this company to your portfolio is just how remarkable its financials are. Last fiscal year, Visa posted a ridiculous operating margin of 64%. You'd be hard-pressed to find many businesses that are more profitable than this one.
Moreover, Visa generates a ton of free cash flow, to the tune of $19.7 billion in fiscal 2023. This is due to the fact that its platform requires minimal capital expenditures, with the technological infrastructure being largely built out and each additional transaction costing close to nothing to process.
This affords the management team the ability to return capital to shareholders. Visa spent $12.1 billion on share repurchases and $3.8 billion on dividends in fiscal 2023.
Caution: Thinking about the valuation
Every investor would agree that Visa is one of the best businesses in the world. The factors I've outlined here point to this reality.
And the share price reflects this. In the last decade, Visa's stock has climbed 374%. This gain trounces the performances of both the S&P 500 and the Nasdaq Composite Index by wide margins.
So, as of this writing, the stock trades at a price-to-earnings ratio of 31.7. That's about 50% more expensive than the S&P 500's valuation. This premium probably isn't much of a surprise.
On the one hand, a strong argument can be made that Visa deserves to trade at a higher valuation than the overall market. But on the other hand, investors should still be critical of the price they pay for a stock, even if it's of high quality.
Buying Visa shares looks like a smart move only if you're comfortable with the valuation. If you're not, perhaps it's best to practice patience and wait for a better entry point.
