Should You Buy Visa While It's Below $275?

Visa (V 0.46%) is one of those companies that barely require an introduction. It’s the payment card king in this country, with far and away the highest number of branded cards in circulation. Most of us hold at least one of the credit or debit instruments stamped with its brand, and it’s no exaggeration to say it’s a major part of the global economy all on its own.

That’s all well and good, but power and prominence don’t necessarily make for a quality stock. Here’s a look at whether Visa belongs in your portfolio as well as your wallet.

Turning plastic into gold

There’s a crucial reason Visa has grown to its current behemoth size. The company is only the operator of the network that processes transactions on its cards. It is not the source of the funds that pay for them.

Activities that keep creditors up at night — setting credit limits, collecting monthly payments, calculating interest for those who aren’t quick to pay — are not Visa’s concern. Instead, they fall to the issuer of the card.

Since it’s the company in the middle of the issuer-merchant-customer transaction triad, Visa — like the other so-called “open loop” card company on the scene, Mastercard — notches a small, single-digit percentage of every transaction made on one of its cards.

That brings in quite a pile. Think of how frequently you whip out your Visa card(s) to buy goods and services. Think of millions more consumers doing that at the same time all over the world, and you’ve got some serious scale.

In Visa’s fiscal 2023, for example, its total payments volume was $12.3 trillion. Meanwhile, its archrival Mastercard was a fairly distant second with just over $9 trillion in its comparable metric.  Both companies saw growth in that torrent of transactions, with Visa’s number rising 6% and Mastercard’s vaulting ahead by 10%.

There were two key factors benefiting the pair — first, a generally healthy global economy despite negative geopolitical and macroeconomic developments, and second, the continued migration of the world’s consumers away from cash and toward convenience solutions like payment cards.

Good fundamentals and fat margins, but…

So Visa is riding high on those two waves. And its business is somewhat recession-proof given that it’s continuing to win big in the war on cash.

As payment volume goes, so go the company’s key fundamentals. The card company’s latest quarter boasted a 10% year-over-year rise in net revenue (to $8.9 billion; remember, the company takes only a sliver of each payment, hence the big difference between payments volume and revenue).

Visa is also reliably and heavily profitable. In that quarter, its non-GAAP (adjusted) net income zoomed 9% higher to $4.9 billion. To say this is a big profit margin is putting it very mildly.

So if Visa is such a runaway success, why has its stock price slumpedn? These days, it trades around the $266-per-share mark, well down from a year-to-date peak of over $290 in March.

At that time, investors were getting impatient for the Federal Reserve to lower its relatively lofty key interest rates. Of course, interest rates are crucial to credit card holders, as they determine how much extra they’ll have to fork over if they don’t pay off their bills every month. The worry was that persistently high rates could reduce Visa’s all-important volume.

This past March, Visa and Mastercard also agreed to a settlement with several U.S. business associations. Over the next three years, the two companies will slightly reduce the fees they charge merchants (which they have been under near-constant regulatory pressure to do). 

Many market players, understandably, aren’t crazy about these lower fees, hence the bearishness. The settlement, by the way, was scotched fairly quickly by a federal court’s ruling in June. But this quite long story is far from over, and we’ll likely see a shaving of fees in the near future.

Buy a key piece of the global economy

All in all, though, Visa is a powerful and hugely profitable company, and its masses of customers are going to continue swiping and tapping. Despite slightly higher penalty rates, inflation worries, and even across-the-board dips in merchant fees, Visa will doubtless continue to post impressively high numbers and margins.

At the same time, that dip in share price has left Visa stock valued at a forward P/E just shy of 24. That isn’t such a high number for a company that’s a crucial player in the planet’s economy. I think Visa is unquestionably a buy, especially at the current price.