Almost every financial company has some sort of digital or tech component today and can be grouped under the fintech category. Visa (V +0.55%) is a well-established, traditional financial giant and one of the largest companies in the world by market cap. It's also a modern fintech superstar with high-tech capabilities that it continually invests in, with strong innovation and plenty of new opportunities.
Visa has only had one stock split in its history since going public in 2008, and today its shares trade at about $277. Is now the time to buy?
The simple, profitable network model
Visa operates a deceptively simple business model that's incredibly effective and profitable. Shoppers know that it powers their credit cards, but what that actually means is that it provides the financial infrastructure to move money from one place to the next. It's a network that connects your issuing bank, which provides the credit, to the merchant that's selling the goods.
NYSE: V
Key Data Points
Every time a shopper swipes their card, Visa gets a tiny fraction of the sale. Multiply that by the millions of transactions that it facilitates daily, and that's a lot of money. It processed more than 296 billion transactions over the past 12 months, which is getting close to a billion daily.
Since it's an asset-light business, as it processes more transactions, its profits increase. Visa has the highest profit margin in the business, and it keeps increasing, reaching 54.7% in the fiscal third quarter (ended June 30).
The industry leader
That's in large part because Visa is the largest payment processing company in the world, with more than $15 trillion in processing volume over the past 12 months. It works with more than 130 million merchant locations globally and powers more than 4.5 billion cards. It has relationships with more than 14,500 financial institutions worldwide.
There are a few large leaders in this industry, including Mastercard and American Express, plus a few smaller players. But it's easy to see why this isn't an easy industry to break into. It requires a huge network of merchants and financial institutions, plus a name and the technology to compete, and those take time to build. There are strong barriers to entry, which means these three players are likely to stay on top for the foreseeable future.
The new technology
Visa is more than just a network, even though that's its core business. It has developed a large set of small business services and has been rolling out new ways for people to shop and pay digitally. Most of its newer innovations are rolled into what it calls new flows and value-added services, both segments that are outpacing overall growth.
New flows includes payment programs beyond credit cards, like digital wallets and Visa Direct, a digital payments service. It also includes partnerships where it provides the financial infrastructure for many of its client banks. New flows transactions increased 41% in the third quarter, with an 18% year-over-year increase in sales, versus a 10% increase for the company.
Value-added services are things like consulting and marketing for small businesses and partner clients, and they were up 23% in the third quarter. These segments beef up the total Visa premise and drive growth for the whole organization.
The Buffett angle
Visa's strong leadership in a lucrative industry practically screams "Buffett stock," and the credit card giant has indeed made it into the portfolio that the Oracle of Omaha oversees. Berkshire Hathaway actually owns all three of the top credit networks -- Visa, Mastercard, and American Express. They fit Warren Buffett's paradigm of companies with a moat, strong management, a large role in the economy, and high profits, although each has its own spin. They also pay growing dividends.
Visa's moat is in its size, position, and global brand. It had a seamless CEO transition last year, and although its dividend isn't high-yielding at 0.75%, it's fast-growing, increasing 333% over the past 10 years.
Is Visa stock cheap?
At $277, Visa stock might not look cheap, but cheap is relative to valuation, not stock price. Visa stock trades at a price-to-earnings (P/E) ratio of 30, which is below the five-year and 10-year average of 35, so it's comparatively cheap right now.
There's every reason to believe that Visa will reach a $300 price tag in the not-too-distant future and easily surpass it, making now an excellent time to buy shares.
