Should You Buy Visa While It’s Under $275?

Visa (V 0.91%) is one of those companies that barely needs an introduction. It is the king of payment cards in this country, with by far the largest number of branded cards in circulation. Most of us own at least one of the credit or debit instruments stamped with its brand, and it is no exaggeration to say that it is a major part of the global economy in its own right.

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

Turning plastic into gold

There is a key reason why Visa has grown to its current size. The company is only the network operator that processes transactions on its cards. It is not the source of the funds that pays for them.

The activities that keep lenders up at night — setting credit limits, collecting monthly payments, calculating interest on late payers — are not Visa’s concern. Instead, they are the responsibility of the card issuer.

As the company in the middle of the issuer-merchant-customer transaction triad, Visa — like the other “open-loop” card company on the scene, MasterCard — charges a small, single-digit percentage of each transaction made on one of its cards.

That brings quite a lot. Think about how often you pull out your Visa cards to buy goods and services. Think of millions of other consumers doing this at the same time all over the world and you have some serious scale.

In Visa’s 2023 fiscal year, for example, total payment volume was $12.3 trillion. Meanwhile, its arch-rival Mastercard was a pretty distant second, with just over $9 trillion in its comparable value. Both companies saw growth in this stream of transactions, with Visa up 6% and Mastercard advancing 10%.

There were two key factors that benefited the pair — firstly, a generally healthy global economy despite negative geopolitical and macroeconomic developments, and secondly, the continued migration of the world’s consumers away from cash and towards convenience solutions , such as payment cards.

Good fundamentals and high margins, but…

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

As payment volume grows, so do the company’s key fundamentals. The card company’s most recent quarter boasted a 10% year-over-year increase in net income (to $8.9 billion; remember, the company only takes a portion of each payment, hence the big difference between the volume of payments and revenues).

Visa is also reliable and very profitable. In that quarter, non-GAAP (adjusted) net income rose 9% to $4.9 billion. To say this is a high profit margin is putting it very lightly.

So if Visa is such a runaway success, why has the stock price dropped? These days, it’s trading around $266 per share, well down from a peak of over $290 in March so far.

At the time, investors were getting anxious for the Federal Reserve to cut its relatively high key interest rates. Of course, interest rates are crucial for credit card holders because they determine how much extra they’ll have to pay if they don’t pay their bills each month. The concern was that persistently high fees could reduce Visa’s important volume.

Last March, Visa and Mastercard also agreed to a deal with several US business associations. Over the next three years, the two companies will slightly reduce the fees they charge merchants (which have been under almost constant regulatory pressure).

Many players in the market, understandably, are not crazy about these lower commissions, where do they come from. The deal, by the way, was pretty quickly thrown out by a federal court ruling in June. But this rather long story is far from over and we will probably see a tax cut in the near future.

Buy a key piece of the global economy

All in all, though, Visa is a strong and highly profitable company, and its masses of customers will continue to swipe and tap. Despite slightly higher penalty rates, inflation concerns, and even overall declines in business taxes, Visa will no doubt continue to post impressively strong numbers and margins.

At the same time, that drop in stock price has left Visa stock valued at a forward P/E of just 24. That’s not such a big number for a company that’s a crucial player in the planet’s economy. I think Visa is definitely a buy, especially at the current price.