Visa (V -1.28%) has historically been a market-beating stock, but it's trailing the S&P 500 index during some recent periods, including so far in 2024. Does that mean it's past its prime, and you should pass it over? Not so fast. Let's see what's going on and whether it's worthwhile to buy or hold on to Visa stock right now.
Why Visa usually beats the market
Visa is a powerhouse company that plays an important role in the world economy. It has no match for its reach, with 4.3 billion credit and debit cards worldwide, easily outdoing any competition. That's a powerful moat, and it continuously invests in its business through technological innovation and partnerships to solidify its edge.
Its business model is fairly simple. Most of its revenue comes from swipe fees, which are the small payment it takes every time someone uses one of its cards. It has organic growth opportunities as more people become members and sign up for new cards. It sees its current addressable market in global payments as more $20 trillion, and its trailing-12-month total payments volume is more than $15 trillion, so it has ample room to increase that this year. It's working to capture more market share by expanding its network for paying bills like rent and education, and working with local networks to travel on Visa credentials.
But it's not stopping there. It is a leader in financial technology, or fintech, and it has launched better, faster payments and money-moving methods. Its two innovation-focused categories, new flows and value-added services, are growing faster than the consumer payments category. New flows, which comprise alternative payment methods like Visa Direct, increased 14% year over year in the 2024 fiscal second quarter (ended March 31), while total revenue was up 10%. Visa Direct helps move money outside of the credit card system.
Value-added services was even stronger in the quarter, up 23% over last year. These are services like tokenization, open banking, and data solutions that add value for partnering financial institutions. Visa makes a lot of acquisitions to bolster this arm of its business and create a formidable financial services giant.
Visa isn't just great at expanding its business; it also has incredible, unmatched profit margins. It's an asset-light company, and sales growth doesn't require much increased overhead or other expenses, leading to high profitability.
V Profit Margin (Quarterly) data by YCharts
Visa's current challenges
The standard argument for Visa's suitability as a stock candidate is that its performance matches the economy. Since the economy is overwhelmingly in growth mode, so is Visa. It has performed impressively during the past few years despite inflation, and many strong retail indicators are helping it along. However, the market often reflects overall investor sentiment, and that can override a company's real performance. The market has become more pessimistic lately, bringing down great stocks along with it.
The stock drop also reflects the market's forward-looking inclination. As the months drag on and the Federal Reserve keeps interest rates high, investors see less potential for a quick turnaround. Inflation and interest rates could stay high for longer than thought, and that is likely to eventually affect spending patterns. The high interest rates, in fact, are meant to limit spending and slow the economy, and the continued spending growth is damping the Fed's plans to end high inflation and cut rates. In that sense, Visa may have to endure some pressure before inflation is tempered.
As of the end of the second quarter, Visa is maintaining an optimistic outlook of low double-digit percentage revenue growth for both the fiscal third quarter and the full year.
Is Visa stock a buy?
Visa stock trades at a price-to-earnings ratio of 31, but that's cheaper than its five-year average of 35.
Since its recent underwhelming performance, Visa stock is about in line with or slightly below the broader market's gains over various recent time periods. However, going further back, it has more than doubled the S&P 500.
Visa stock could go sideways until there's a more positive economic outlook, but since you can't usually time the market, now might be an ideal time to buy and benefit when it begins to make more serious gains.
