Legendary investor Warren Buffett and his company, Berkshire Hathaway, are known for savvy stock picking. Certainly, he’s had his fair share of duds – look no further than IBM – but he’s also made enormously successful bets ($100+ billion gain on Apple alone is a classic recent example). Another successful addition has been Visa.
Although Berkshire Hathaway sold roughly 4% of its stake in Visa in Q3, there is no indication that Buffett plans to eliminate this stock altogether from his portfolio, and why would he?
The recent pandemic greatly accelerated the use of digital payments around the globe. In 2021, Visa’s stock hit all-time highs, reaching nearly $250 per share in July. Since then, Visa’s stock has fallen by almost 20%. However, Visa remains one of the largest payment companies in the world, with no signs of slowing down.
Here is why you Visa might be the 1 Warren Buffett stock to buy hand over fist.
What Is Visa and What Is Its Business Model?
Visa Inc. (V) is an American multinational financial services corporation that facilitates electronic fund transfers. This is mainly achieved through Visa-branded credit cards, as well as debit cards and prepaid cards. Visa is a name everyone knows — but how does it make money?
While some business models are obvious, others are not, and Visa’s business model is a prime example. Yes, Visa is a credit card company, but it does not turn a profit from the interest rates charged by the card as, say, JP Morgan Chase or Bank of America does. Instead, it is a card issuer that earns revenues from each transaction. Think of Visa more like a toll collector that is inserted into every credit card transaction.
As a result, Visa does not face the loan default risk that comes with lending money, which Wall Street tends to favor, and which drives up Visa’s potential valuation. Since Visa does not deal with lending risks, it means that the company’s price-to-earnings ratios are generally much higher than the valuations of issuers like Capital One and JPMorgan Chase.
Visa is the middleman among the card-issuing financial institutions, the merchants, and the merchant’s bank. Every time a Visa card is used, the company takes a fee. These revenue streams, including service revenues, data processing revenues, and international transaction revenues, make up the vast majority of the company’s overall revenue.
Despite the global pandemic, in the fourth quarter, Visa set a record for global payments volume, hitting $2.8 trillion. While reviewing fourth-quarter payments, volume was up 0.8 points from Q3 and 17% year over year, and net revenues grew 29% year over year.
Moving forward, Visa representatives believe there are still major opportunities ahead in customer payments.
Some of the deals Visa renewed in Q4 include Bank of China, RBC, PNC, and Regions. In addition, over the past year, nearly 30% more fintech companies issued Visa credentials, doubling their payment volume. Another tailwind: Visa is accepted in more than 80 million merchant locations, an increase of 14% year over year. These are just a few of the many examples, which is why Visa is one of the most attractive long-term stocks to buy.
Visa is so big that even when large deals are announced, such as the use of Visa Direct by Airbnb, they don’t have a significant effect on stock prices by themselves. In Q3 2021, Visa Direct hit one billion transactions for the first time, thanks to its many partnerships.
Visa has a powerful moat, and it is the company’s acceptance, innovation, and credentials that will continue to fuel growth. The company continues to rapidly scale in several markets around the globe, and as consumers get back to eating out, vacationing, and shopping in stores again, they should continue to drive Visa’s growth in the decade ahead.
Another aspect of Visa’s moat is its powerful network that connects billions of customers who use millions of merchant locations that accept Visa. In turn that produces billions of transactions that yield trillions in payments volume.
Concerning dividends, Visa paid a quarterly dividend of $0.32 per share, returning over $3.7 billion of capital in Q3. In October 2021, the company’s board of directors authorized a 17% increase in the quarterly dividend, increasing it to $0.375 per share.
So, What Are the Risks?
Much like its competitor, Mastercard, Visa experienced significant pressure because of COVID-19. In the first half of its last fiscal year, net revenues dropped 4% and non-GAAP EPS was down 2%. Although this had some investors worried, believing that Visa stock was too expensive, the company reported a strong recovery in the second half. Net revenue grew 28% and non-GAAP EPS was up 43%.
Although Visa isn’t going anywhere and will continue to grow, some investors are more interested in disruptive technologies like cryptocurrencies. Visa is now partnering with dozens of crypto companies — which is paying off. More than $1 billion was spent on crypto-linked Visa cards in the first half of 2021 alone.
With all that being said, the analysts’ consensus is that although there are some new players to consider, few companies are as profitable or as deeply ingrained in the global economy as Visa. The premium price tag that comes with Visa is justified by the company’s wide moat and ongoing growth potential.
Should You Buy Visa Stock?
Showing no signs of slowing down, Visa has reported that the company is better positioned than before the pandemic, ready to capture the opportunities ahead. The company’s continued growth will be supported by strong growth in consumer payments, growing network, the addition of value-added services, and the scale of Visa platforms.
Overall, Visa is an impressive and well-rounded stock with high returns on capital, high cash flows, and a positive outlook. If you’re an investor interested in the long-term, Visa is both stable and growing. As such, it’s a favorite Warren Buffett stock to buy hand over fist.