Is Visa Stock a Buy?

One of the best ways to make sound investment decisions is to pay attention to Warren Buffett’s portfolio. Many of its biggest stocks have outperformed the market for years or even decades at a time.

One of his long-term positions, Visa (V 0.75%)it came to my attention after a recent correction. Buffett has held this stock since 2011. There are two compelling reasons why you should consider Visa for your portfolio right now.

This is the type of stock any investor wants to own

In one of his most famous quotes, Buffett tried to explain a lesson he has always learned: Trust great businesses, not management teams. “When a management with a reputation for brilliance approaches a business with a reputation for bad economics,” Buffett once advised, “the reputation of the business remains intact.”

The lesson here is simple: buy high-quality businesses that even a half-competent management team could run. In this regard, Visa is the perfect example. A few months ago, I speculated that Visa could become the next trillion dollar stock. I didn’t love the smart management team, but the fundamentals of the business that even a weak management team would have a hard time screwing up. Visa’s main advantage, I argued, was the long-term windfall of network effects.

What are network effects? This business school term essentially describes a product or service that becomes more valuable the more people use it. Social media is a prime example. Even the best social media platform won’t get anywhere without hitting a critical mass of users. In this way, a social network’s biggest asset is its user base, not its technology. People want to join networks that others are part of, which means that larger platforms generally tend to get bigger over time.

Payment networks like Visa work in much the same way. No one wants to use a credit or debit card that merchants won’t accept. And merchants don’t want to accept forms of payment that consumers don’t use. The natural result is the consolidation of the industry. According to data compiled by Statista, Visa holds a massive 61% market share for general purpose payment cards in the US MasterCard ranks second with a 25% market share, while only two companies round out the rest of the industry. This is not a new dynamic either. Mastercard and Visa have enjoyed duopoly positions in the industry for more than a decade, with Visa holding a significant lead throughout.

Great stocks are rarely this cheap

Massive industry consolidation combined with a low-asset business model has resulted in huge and consistent profits for Visa. The return on equity is incredibly impressive considering the company uses a conservative amount of leverage. Free cash flow generation has almost always been positive. And after a small correction, shares are now trading at near their cheapest levels in years on a price-to-earnings basis.

V PE ratio data by YCharts.

right now S&P 500 overall, it trades at a price-to-earnings ratio of 29.2. That means Visa stock is trading at a discount to the market average, despite operating an incredibly reliable and profitable business model that benefits from network effects that should last for decades to come. According to recent filings, it does not appear that Warren Buffett sold any of his Visa positions. It’s hard to imagine him doing that at these prices.

Is Visa stock a buy right now? The answer seems to be a resounding yes. At these levels, the company is a great fit for both value and growth investors.