Visa (V 0.30%) is one of the few notable S&P 500 companies that saw its stock price increase over the past 12 months. After losing more than a quarter of its value from July 2021 to September 2022, Visa stock has rallied more than 30% since then — including more than 10% year to date.
Unlike companies in most industries, Visa actually benefited from the elevated inflation levels over the past year. Its simple business model — when somebody uses a Visa card to execute a payment, the company takes a percentage — got a boost because higher inflation means larger transactions to benefit from. Those larger transactions helped Visa bring in more than $29.3 billion in revenue in fiscal 2022 (ended Sept. 30). This was a sizable increase from the $24.1 billion and $21.8 billion, respectively, in revenue generated in fiscal 2021 and 2020, respectively.
Aside from its current financial success, Visa is primed to be a great long-term investment. Here are two reasons to be bullish on it in 2023 and beyond.
1. Visa has undeniable customer and merchant reach
If you own an American Express or Discover credit card, there’s a good chance you’ve dealt with a merchant, retailer, or restaurant that didn’t accept your card. It’s highly unlikely that any of these same merchants didn’t accept a Visa card. There’s a simple reason for that: Visa’s merchant network is unmatched.
The number of merchant locations accepting Visa now exceeds 80 million — 19 million more than just three years ago. And that doesn’t include the roughly 20 million locations that use Visa as a payment facilitator to provide the infrastructure they need to accept card payments.
It won’t be easy for competitors to catch up to Visa’s reach, considering its head start, especially at the pace the company continues to grow and add merchants and cardholders. As the world continues to progress toward a digital economy where the demand for electronic payments will increase, Visa is in a good spot to grow its dominance.
It also helps that the company is essentially operating in a duopoly against Mastercard. When comparing price-to-earnings ratios — which tell an investor how much they’re paying for $1 of a company’s earnings — Visa seems to be the better value of the two right now.
DATA BY YCharts.
2. Margins matter
A company’s gross profit margin tells you how much money it has after accounting for the cost of goods sold (COGS). To find the gross profit margin, subtract COGS from revenue and then divide it by revenue. For example, if a company makes $100 million and its COGS is $75 million, its gross profit margin would be: ($100 million – $75 million) ÷ $100 million = 0.25, or 25%.
Visa’s large reach didn’t happen overnight, and much of the money and investments it made to expand its network was spent many years ago. Now, Visa reaps the benefits (read: profits) without spending as much in the present, leading to high margins.
Very few companies can say they come remotely close to Visa’s gross profit margins. For perspective, here are Visa’s margins, compared to leaders in other industries. Margins vary widely by industry, but it just shows how lucrative a position Visa is in, given its industry and business model.
DATA BY YCharts.
Visa’s unique position should reassure investors that the company will be able to keep high profits rolling in, even as inflation cools down (and less revenue comes in from smaller transactions for Visa).
The company hasn’t lost steam and continues to grow its key business drivers. In its fiscal 2023 first quarter, the company’s processed transactions grew 10% year over year and its total payments volume grew 7% year over year. Its momentum is headed in the right direction.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Stefon Walters has positions in Apple and McDonald’s. The Motley Fool has positions in and recommends Amazon.com, Apple, Mastercard, and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.