Visa (V -0.13%) is by far the No. 1 U.S. payment card company in terms of payment volume, branded cards outstanding, and market cap. What it hasn't been lately is a popular investment; it has lagged the S&P 500 index, under-performing the benchmark stock gauge so far in 2024. It also trails the index if you go back one, three, and even five years.
However, the company's recently released earnings report featured a double beat on analyst estimates, accompanied by some impressive growth numbers. So is Visa, for all its size and might, something of a sleeper stock these days? Or is the market's indifference justified?
Looping into growth
First, in order to get a clear idea of Visa's business, it's important to note what the company does, and does not do, to earn its coin.
It is the brand adorning scores of credit and debit cards, and it processes the transactions on those cards. For this it receives a small percentage of each purchase. The company is not the issuer of those cards -- in other words, it does not extend any credit, nor does it shift the money from a customer's account in the case of debit cards. Your card issuer, debit or credit, is almost always a bank or other financial institution.
In the payment card world, companies like Visa are "open loop" operators, in that other entities are involved in the transactions with its plastic. Arch-rival Mastercard is also an open-loop company. Closed-loop operators, by contrast, typically also act as the issuers of the credit, hence the "closed" descriptor. American Express and Discover Financial Services -- recently acquired by Capital One -- are two such companies.
There is no "superior" operating model here; both have advantages and disadvantages. A major plus for Visa (and Mastercard, of course) is that open loopers are basically middlemen that dip into a transaction and get out. Someone else has to worry about whether a credit card holder is going to pay their balance.
Then again, closed loopers get to charge high interest rates of credit card debt, and can also harness the reams of data they have on their clients to enhance their own businesses.
With its relatively light operating profile, the game with Visa is to get its cards into as many wallets and purses as possible. This is a volume business; the more customers charge on their cards, the more fees Visa can reap.
The company has been doing this effectively for years. In its fiscal second quarter, it managed to crank total payment volume 8% higher year-over-year, on a double-digit (16%) rise in cross-border transactions. This powered net revenue to a 10% gain (at $8.8 billion), filtering down to a $5.1 billion non-GAAP net income figure for a robust improvement of 17%. Visa beat analyst estimates on both the top and bottom lines.
A solid company that's being ignored
Good growth numbers and quarterly beats are the norm, not the exception for Visa. So perhaps the "same old same old" is why its share price sagged a bit after those second-quarter figures were published. Investors might also be thirstier for yield these days, and Visa isn't a great stock for that -- while the company consistently pays a dividend and raises it annually, its yield has always been a blip. These days it pays out at a mere 0.7%.
Meanwhile, its forward P/E has fallen under 30 (it currently stands at a shade over 28), at a time when analysts are collectively forecasting 16% growth in per-share earnings this year alone, on a sprightly 12% pop in revenue. Those percentages are predicted to dip slightly, but still land in double-digit territory in fiscal 2025.
As long as the global economy continues to be more or less healthy, I think those projections might be modest. The world is still shifting to non-cash means of payment -- standard in the U.S. now, but not necessarily so in other corners of the globe -- and the first beneficiary of this will be the most powerful card company on the scene, Visa. This is a good stock to own, and with many investors ignoring the company, now is a good time to buy it.
