Visa (V 0.18%) has historically been a wonderful investment. Since its initial public offering in 2008, shares have rocketed 1,750% higher. The business has rewarded investors much more than the broader S&P 500 would have. Today, Visa sports a massive $524 billion market cap.
With this top financial stock about 10% off its peak price (as of July 10), is it a buy, sell, or hold for your portfolio?
What's not to like?
Visa's impressive gains can be attributed to its strong fundamental performance. Between fiscal 2013 and fiscal 2023 (ended Sept. 30 of last year), revenue increased at a compound annual rate of 10.7%. What's noteworthy is just how durable this growth has been. Besides sales dipping single digits in fiscal 2020 due to the pandemic disrupting the global economy, revenue was up in every other year in the past decade.
And during that 10-year stretch, net income rose at an annualized pace of 13.2%. Furthermore, Visa's strong profitability can't be ignored. Its operating margin in the latest fiscal quarter (Q2 2024 ended March 31) was a reported 61%, which is outstanding. You'd struggle to find companies that exceed this lofty figure.
That stellar financial track record has been propelled by the ongoing secular trend of cashless transactions. As the internet and smartphones proliferate, making the world and commerce more digitized, there is a greater need to transact without the use of paper-based methods.
In the U.S., which is one of the most developed economies, there is still room for Visa to expand its penetration. According to Pew Research Center, 58% of Americans still used cash for all or some of their weekly transactions in 2022. I'd expect that figure is slightly lower today, but you get the idea of the growth potential. In emerging markets -- such as Latin America, Africa, and Southeast Asia -- Visa's opportunity is likely much larger.
Network effects are another reason to appreciate this business. Visa has 4.4 billion cards in circulation that are accepted at 130 million merchant locations across the globe. This broad reach makes the Visa network incredibly valuable for consumers (because the cards are accepted everywhere) and for merchants (because so many individuals are cardholders). This favorable setup gives me confidence that the company is not going to get disrupted anytime soon.
NYSE: V
Key Data Points
It comes down to valuation
I'd bet that the vast majority of investors who follow Visa and understand its operations would agree that this is truly one of the most outstanding businesses on the face of the planet. Its financial performance, ridiculous profitability, growth potential, and network effects are wonderful qualities that should at least place this company on anyone's investment watch list.
However, that doesn't automatically make the stock a screaming buy. A good business doesn't always result in a good investment. Investors need to also assess the valuation. If you overpay for a stock, the returns could be disappointing. On the other hand, if you pay the right price, there could be added upside as the market starts to appreciate the company more.
As of this writing, Visa trades at a price-to-earnings (P/E) ratio of 29.2. That might seem expensive at first glance to some. If this is what you believe, and/or you have what you deem to be a more attractive investment opportunity to direct capital toward, then perhaps you might consider selling.
But I don't view the situation this way. Visa's P/E multiple represents a notable discount to the stock's trailing five- and 10-year averages. This could indicate an undervalued business.
I believe that Visa stock looks like a smart buying opportunity today. And for existing shareholders who remain bullish, I don't think there's any reason to sell.
