With a current market cap of $552 billion, Visa (V +0.71%) is one of the most valuable companies in the world. Its shares have performed well for investors, rising 420% in the past decade.
Investors who have been on the sidelines are probably wondering if now is a good time to buy this top financial stock. Let's take a closer look at Visa.
Steady growth
Visa doesn't get the attention that many tech enterprises do, but that doesn't mean it hasn't put up strong results over the years. The company's revenue has climbed at a compound annual rate of 9.9% over the past five years. There was a decline in fiscal 2020 due to the pandemic and its disruption of the global economy, but other than that, the top-line gains have been fairly consistent.
Visa benefits from some broad-based trends. As the global economy grows every year, consumer spending also rises. And this provides a favorable backdrop that allows the business to bring in more revenue from processing transactions.
Then there's the ongoing shift from cash usage to cashless and digital forms of payment. Visa is the largest card network in the world, handling $14.8 trillion in payment volume in fiscal 2023. It is in a prime position to continue growing revenue as people and businesses move away from cash and find the convenience of electronic transactions to be too compelling to ignore.
Tremendous profitability
There aren't very many companies that are as profitable as Visa. In the past decade, its operating margin has averaged a ridiculous 65.9%. This has helped drive impressive diluted earnings-per-share growth over the years.
Visa's incredible profitability can be attributed to its scaled business model. Because the technological infrastructure has already been built -- connecting consumers, merchants, and financial institutions -- every marginal transaction Visa processes carries high margins.
There are also minimal capital expenditure requirements, resulting in copious amounts of free cash flow being generated. Management uses this windfall to pay dividends and repurchase shares.
NYSE: V
Key Data Points
Wide moat
Visa's long-running success is helped by the fact that the company possesses a wide economic moat that protects it against the threat of competition and new entrants in the space. This is the key sign of a high-quality business.
Visa currently has 4.4 billion active cards in circulation that are accepted at more than 130 million merchant locations. This setup creates powerful network effects. An entrepreneur that wanted to start a rival payments platform from scratch would be facing an uphill battle, because they'd have to find merchants to sign up without having any cardholders, and vice versa.
Even with the rise of various fintech specialists in more recent times, Visa has continued to grow its revenue and earnings at solid rates. That's a clear indicator it's in a strong industry position.
What about the valuation?
Thanks to Visa's healthy growth prospects, outsize profitability, and network effects, the market is aware that this is an outstanding company, and the share price reflects that.
Consequently, the valuation never looks cheap, at least when compared to the overall S&P 500. Shares trade at a price-to-earnings ratio of 30.6. For what it's worth, this still represents a discount to the trailing five- and 10-year average valuation multiples.
I can understand why investors who prioritize valuation might hesitate to buy the stock. But remember that this is one of the best businesses in the world, so the premium is justified.
At these levels, Visa still looks like a smart investment opportunity.
