Investing in the stock market can seem like a daunting task when one is just starting out. One way for investors to ease their initial fears is to focus on the most dominant and well-known businesses.
These blue chip stocks can add some safety to your portfolio, and perhaps no company embodies that better than Visa (V 1.67%). This top financial enterprise has been a huge winner over the past decade, producing a total return of 488%.
Even better, it still looks like a no-stress buy.
Avoiding the lending game
One reason Visa looks like a stress-free stock purchase is its business model. Investors are surely familiar with traditional banking entities like JPMorgan Chase and Bank of America. At a high level, these financial institutions take in deposits and lend money to consumers, sometimes via credit cards.
Those unsecured loans create default risk, which requires banks to set aside lots of capital to cover potential loan losses. During economic slowdowns and recessions, those losses can surge. The result is that these banks experience bouts of cyclicality that track the changes in the economy and interest rates.
Visa is less of a financial institution and more of a technology and communications firm. It provides the infrastructure that allows merchants' banks and consumers' banks to interact with each other to facilitate transaction processing. That's a much less risky business model.
NYSE: V
Key Data Points
An asset-light operation
Another reason Visa is a no-stress buying opportunity builds on the previous point about its business model. This company doesn't earn interest income because it doesn't lend money. Instead, Visa collects a tiny fee each time one of the 4.3 billion Visa-branded cards active now is used as a method of payment. These assessments are usually less than 0.15% of the transaction's dollar amount.
But given that Visa handled a whopping $15 trillion of payment volume in its fiscal 2023, those fees add up to a financially lucrative enterprise. Its operating margin has hovered above 60% in the past five years, which is truly remarkable. It would be a difficult task to find companies more profitable than this one.
Additionally, Visa's technology is largely already built out, so its capital investment requirements are minimal. In its fiscal 2024 first quarter, which ended Dec. 31, the business spent just $267 million on capital expenditures -- 3% of its revenue during the period.
Thanks to its asset-light model, Visa generates tremendous amounts of free cash flow.
Riding the digital payment revolution
Despite being a long-established company with a $553 billion market cap, Visa still has sizable growth prospects. The consensus estimate among Wall Street analysts is that its revenue will grow at a compound annual rate of more than 10% over its next three fiscal years.
A key driver of these gains will be the ongoing secular shift from cash- and paper-based transactions to cashless means of payment. There is still plenty of room even in developed economies for card-based transactions' market share to grow. In emerging markets, the opportunity is even larger.
Huge growth prospects attract competitive forces. In Visa's case, it has had to deal with the rise of various fintech companies trying to encroach on its turf. There's also the possibility that cryptocurrencies and blockchain technology could become bigger presences in the payments landscape.
However, Visa has continued to post strong volume, sales, and earnings growth even as these perceived threats to its model have expanded. The company's durability is another reason it would be a stress-free blue-chip stock to buy right now.
