Since Visa's (V +0.61%) initial public offering in March 2008, its shares have produced a total return (including reinvested dividends) of 2,380%. That tremendous performance absolutely trounced the 552% total return that the S&P 500 index generated during the same period.
The company's success has benefited Warren Buffett's Berkshire Hathaway, as 0.9% of the conglomerate's huge equity portfolio is in Visa shares. But is this financial stock headed higher?
Visa is a high-quality business
For a company to put up returns that spectacular, there must be some very positive factors working in its favor. Investors should get familiar with the three key traits that make Visa an extremely high-quality business. In fact, I'm sure these characteristics are what caught the attention of Buffett and his team.
Visa's revenue grew from $12.7 billion in fiscal 2014 to $35.9 billion in fiscal 2024 thanks to the continuing rise of cashless transactions, which add convenience and security for both shoppers and merchants. Even in developed economies, cash is still used often, so there's a long runway for digital payment methods to increase their market share.
The rise of fintech digital wallets, like PayPal and Apple Pay, for instance, is only helping spur the adoption of cashless transactions by making it more seamless to use a linked debit or credit card. As a provider of the base layer service that connects consumers, merchants, and banks, Visa continues to be a major beneficiary of this secular trend.
There are 4.6 billion Visa-branded cards in use around the world. On the other side, these cards are accepted at more than 130 million merchant locations. That enormous two-sided ecosystem drives powerful network effects. The larger its network becomes, the more valuable it is to all stakeholders, and the more attractive the proposition of joining it becomes.
To start a competing payment platform from scratch would be a nearly impossible endeavor. Any would-be upstart would have to successfully solve the chicken-and-egg problem: How can one convince consumers to sign up for a payment option that most merchants don't accept? And how can one convince merchants to use a platform that has few customers? This wide barrier to entry protects Visa's dominance.
Lastly, it's hard to ignore just how lucrative Visa is. As a scaled payment network, the business posts a ridiculous 66% operating margin. Management uses the copious amounts of free cash flow the company generates to pay dividends and repurchase shares, a policy that Buffett appreciates.
NYSE: V
Key Data Points
Visa's return potential
Visa has been a wonderful investment for long-term shareholders, but investors can't expect such monster gains to continue indefinitely. Visa is a more mature enterprise, and it sports a $600 billion market cap. Viewed from that perspective, its upside is more limited, especially when compared to the past.
Yet investors should also consider the valuation. The shares currently trade at a price-to-earnings (P/E) ratio of about 32. This is below Visa's trailing five- and 10-year averages, an encouraging sign.
According to the average of Wall Street analyst estimates, Visa's earnings per share (EPS) will increase at an annualized rate of 12.7% during the next three fiscal years. In the past five years, its EPS has climbed by an average of 12.8%, so the outlook is reasonable and within historical norms.
I think there's a near certainty that shares of Visa are headed higher in the future. While their valuation is expensive relative to the S&P 500's P/E ratio of 25.4, it's not egregiously high, considering the quality of this business. Even if the company's earnings multiple contracted to the market's average in the next decade, Visa's potential to generate double-digit percentage earnings growth annually should more than offset that.
