In the last one-, three-, five-, and 10-year periods, Visa (V -0.23%) shares have beaten the gains of the S&P 500 (as of Jan. 18). This superb track record of consistent outperformance is only possible if the underlying business possesses strong fundamentals.
In this instance, that is definitely the case. But does Visa make for a smart investment today? Continue reading to find out whether this financial stock is a buy, sell, or hold for investors.
Stellar financial results
The recent macroeconomic environment has been highly uncertain. Interest rates have risen at a rapid pace in the last two years, as the Federal Reserve continues to prioritize fighting inflationary pressures. And while the economy has remained resilient, there's still the possibility of a recession in 2024.
Despite this backdrop, Visa's business is operating with no disturbances. Sales jumped 11% in fiscal 2023 (ended Sept. 30), driven by a 9% rise in total payment volume. Cross-border activity was a standout area, particularly due to outbound travel from the U.S. And the leadership team sees this continuing.
Profitability remains impressive, as the company's net income increased by 15% to total $17.3 billion. This translates to a magnificent margin of 53%.
The latest numbers simply continue a long history of strong financial results for Visa. At a high level, the business not only benefits from the growth of the global economy and consumer spending, but also from the rise of cashless transactions. There's no reason to believe these trends won't keep propelling Visa.
Minimal threat of disruption
Warren Buffett prefers owning companies that possess certain qualities that help protect them against competitors and new entrants. Just look through Berkshire Hathaway's massive equities portfolio, and you'll quickly find many businesses that have an economic moat.
Visa might have one of the widest economic moats around. In this case, the payments giant benefits from network effects.
Network effects are present when a service becomes more valuable as its user base grows. Think of Meta Platforms' popular Facebook social media app. It's infinitely more valuable by having over 3 billion monthly active users than it would be with just one person.
Visa exhibits similar dynamics. Its two-sided network, consisting of 4.3 billion cards and 130 million merchant acceptance locations, becomes exponentially more valuable as it grows.
If a well-funded entrepreneur wanted to create a new payments network from scratch, it would be an impossible task to sign up consumers and merchants from scratch and incentivize them to utilize the platform. This makes me believe that Visa's competitive position is almost unassailable.
Investment considerations
There's no doubt that Visa is a high-quality company, especially when you consider what I've just discussed. But what should investors be doing as it pertains to the stock?
Firstly, I struggle to find any compelling reason for why someone would want to sell their Visa stake. If you've been a long-term shareholder, you're probably sitting on sizable gains. But the business is positioned well to continue this type of performance in the years ahead.
Of course, selling makes complete sense if you've identified a company that makes for a much better investment opportunity than Visa. This seems like a tall order, though.
The conclusion is that Visa shares are worth holding on to. And for prospective investors, they make for a smart buying opportunity right now. The current price-to-earnings ratio of 32.3 is in line with the trailing-10-year average. That's a reasonable entry point for such a fantastic business.
