In the past decade, Visa (NYSE: V) has produced a total return of 426%. This gain is well ahead of the 234% total return of the broader S&P 500. That type of outperformance over an extended period should catch investors' attention.
As of this writing, Visa trades 10% off its peak price from March of this year. Its current price-to-earnings ratio of 28, which doesn't look cheap at first glance, is below the trailing 10-year average.
Besides strong past performance and a reasonable valuation, here are three must-know reasons this blue chip stock is a no-stress buy.
1. Visa is not a lender
Investors are probably familiar with banks like JPMorgan Chase and Capital One. Among some of their most lucrative consumer-facing products are credit cards. These businesses market their offerings, approve borrowers, underwrite risk, and lend money to fund purchases -- earning interest along the way.
While this can be a lucrative activity, it ties up a lot of capital. These lenders must set aside money to cover potential borrower defaults. Moreover, it can make their financial results very cyclical. In recessionary periods, the losses could be a major cause for concern.
Visa is different. It doesn't approve borrowers or lend capital, reducing cyclicality and financial risk. Instead, the business provides the technological and communications platforms that allow those banks, consumers, and merchants to interact with each other. This is a much safer operation.
2. Toll-booth business model
The next reason Visa is a no-stress buy again has to do with its business model. Since Visa isn't a lender, it doesn't earn interest income. But that's not a problem.
A whopping 4.5 billion Visa cards are out in the world. Anytime one of them gets used as a method of payment, Visa earns a tiny amount, called an assessment fee, that is in the ballpark of about 0.14% of a transaction's dollar amount. Given that Visa handled $3.9 trillion in payment volume during the three-month period that ended June 30 (Q3 2024), those fees add up.
This is an extremely lucrative enterprise, which is attributable to Visa's asset-light business model. The company's operating margin in the last five years has averaged a ridiculous 66.3%. Because capital expenditures are low -- 4.5% of revenue in the latest quarter -- Visa generates lots of free cash flow.
3. Secular tailwind
Visa is one of the world's largest and most valuable companies, with a market cap of around $513 billion. However, investors can remain optimistic because there are meaningful growth prospects in the years ahead. Wall Street analysts believe Visa can grow its revenue at a 9.8% annualized pace over the next three years. In the past decade, revenue has climbed at a 10.8% yearly rate.
The business has long benefited from the increase in cashless transactions across the economy. The rise of the internet, smartphones, and globalization, as well as the added convenience and security of using a credit card, has spurred the decline of cash and paper-based methods of payment. Visa can further penetrate emerging and developed markets.
One possible risk factor is the rise of various fintech services from the likes of PayPal and Block, for example. However, Visa's tremendous financial success over the years proves it has gained as the overall payments industry has flourished.
The fact that Visa doesn't lend capital, its asset-light business model, and the growth of cashless payments are all reasons that make this a no-stress stock to buy and hold for the long haul.
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*Stock Advisor returns as of July 29, 2024
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block, JPMorgan Chase, PayPal, and Visa. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
