In the last decade, shares of Visa (V -0.23%) have climbed by 375%. This gain exceeds both the S&P 500 and the Nasdaq Composite Index by a wide margin. Thanks to this remarkable past performance, investors might have their eyes on the company as a potential portfolio addition right now.
If one takes the time to understand Visa, it's extremely easy to find compelling reasons to like this enterprise. But is now a good time to buy this massive card-payments business? Here's why I think that's a smart idea.
Reporting solid results
In the past couple of years, macroeconomic headwinds, particularly higher interest rates and inflationary pressures, have negatively impacted most businesses out there. And while many companies have reported significantly slowing growth, Visa continues humming along.
In fiscal 2023 (ended Sept. 30), the business reported revenue of $32.7 billion, which was up 11% year over year. This was propelled by payment volume that jumped 5% to a whopping $14.3 trillion. As has been the case in recent times, management reported strength in cross-border activity.
Visa also continues to register strong bottom-line gains. Diluted earnings per share (EPS) surged 18% last fiscal year. And in the last 10 years, this metric has climbed at a compound annual rate of 15.9%. This is part of the reason the stock has done so well for investors.
Looking ahead, executives believe the current fiscal year will be a return to normal following geopolitical and pandemic-related disruptions. "For the full year, we expect low double-digit adjusted net revenue growth," said CFO Chris Suh on the fourth-quarter 2023 earnings call.
What's attractive from an investment perspective is that it really doesn't matter what happens with the economic backdrop. In both good and bad times, Visa should continue to post solid financial results. And this can reduce risk in one's portfolio.
One of the best businesses around
Setting aside some of the shorter term headwinds like the pandemic and rising interest rates, investors will find no shortage of reasons to like this business. As the world's dominant payment network, Visa has easily become a mission-critical service provider for both consumers and businesses. Just think what would happen if the network suddenly stopped working. This demonstrates how important the company really is.
And with 4.3 billion cards in circulation worldwide, coupled with over 130 million merchant locations that accept them as a form of payment, the business is protected from the threat of disruption thanks to its powerful network effects. The two-sided ecosystem only becomes more valuable the larger it gets.
Warren Buffett once said, "The best business is a royalty on the growth of others, requiring little capital itself." Because Visa doesn't approve borrowers and extend credit itself, it fits Buffett's description. Banks are the ones that partner with Visa to issue cards, thus taking on the default risk of its customers.
Investors will be happy to know that Visa is highly inflation-resilient. The company collects a tiny percentage fee every time one of its cards is swiped. So, anytime consumers pay more for things in their daily lives, the revenue potential for Visa rises. There aren't many businesses that are well positioned like this one.
A reasonable valuation
As of this writing, Visa shares trade at a price-to-earnings ratio of 31.9. This is not only cheaper than the stock's historical 10-year average valuation, but it also represents a discount to Mastercard. This seems like a reasonable entry point to me.
What are investors getting when paying this valuation? According to consensus analyst estimates, Visa is projected to increase revenue and EPS at annualized rates of 10.5% and 13.4%, respectively, between fiscal 2023 and fiscal 2026. And based on all the positive characteristics of the business that I discussed above, there could be many more years of the same type of double-digit growth.
Therefore, it looks like a good idea to add this stock to your portfolio and hold it for the long term.
