The S&P 500 might be up 22% in 2024 (as of Sept. 26), including dividends. But there are some otherwise dominant businesses that have underperformed the broad index. Just look at Visa (V +0.25%). While shares have been a massive winner in the past decade, they have produced a total return of just 5% this year.
Should investors buy Visa right now? Continue reading to understand why I believe this might be a good idea.
Visa's latest dip
Shares of Visa are currently under pressure, having dropped 5% in the past several days from their peak. The Department of Justice just sued the business for monopolizing the debit card market, arguing that Visa illegally maintained its dominant position by penalizing merchants for using other payment services and by discouraging competitors from entering the market.
Drawing the attention of regulators is nothing new for Visa or its industry peer, Mastercard. Both businesses are in leading positions in the payments industry. And as a result, they are vital to the smooth functioning of the economy.
It's anyone's guess how the current lawsuit will play out. It could be a long legal battle for Visa that diverts management's attention and resources. But I view regulatory action as a clear indicator of just how successful Visa is, as it handles more than 60% of U.S. debit card transaction volume.
After the stock's latest tumble, shares trade at a price-to-earnings ratio of 29.6. On the surface, this doesn't look cheap by any means. It represents a 23% premium to the overall S&P 500. However, Visa's current valuation is meaningfully below its trailing-five-year average of 34.9. This makes the stock a worthy buy-the-dip candidate right now.
NYSE: V
Key Data Points
Visa's positive traits
If investors are willing to look past Visa's latest regulatory headache, there is a lot to like about this business. Perhaps these three notable characteristics are the most favorable that investors should be mindful of today.
For starters, Visa is positioned well to continue benefiting from the so-called war on cash. In the U.S., 58% of Americans used cash for some or all of their transactions in a typical week in 2022. That was down from a share of 75% in 2015. There is still clearly a lot of opportunity for consumers to take advantage of the added convenience and security of using cards as the primary method of payment.
In developing markets, a higher proportion of the population is likely to be unbanked or underbanked. As these economies progress, Visa could handle more payment volume over time. And this should trickle into durable revenue growth.
Visa's incredible profitability is another top reason to like this business. The company reported a magnificent operating margin of 67% in its fiscal 2024's third quarter (ended June 30). investors would struggle to find businesses that post a higher figure than this.
Having handled almost $4 trillion in payment volume and raking in $8.9 billion in revenue in Q3, Visa is a scaled payment processor. Its operating costs are largely fixed. And it requires very minimal capital expenditures to grow because the technological infrastructure is already built out. The result is tremendous earnings power and free cash flow.
Maybe the most compelling case that can push investors to buy Visa stock is the presence of network effects. This is what underpins the company's economic moat. And it's precisely what protects Visa's competitive position from the threat of new entrants.
There are 4.5 billion Visa cards in use across the world, coupled with more than 130 million merchant locations that accept them. This massive two-sided network is extremely valuable to all stakeholders. And it would be almost impossible for someone to create a new system from scratch that even comes close to this.
Visa might be under pressure due to regulatory concerns. But this is a high-quality business that deserves investment consideration.
