Visa (NYSE:V) has been a big winner for investors since it went public in 2008, but its stock plunged along with the rest of the market last year as the novel coronavirus became a global health crisis. While the stock has recovered quite nicely since dropping by more than a third in a little over a month, it has still lagged the S&P 500 index since its March 23 low.
There’s no doubt that Visa’s business was hurt as economic activity slowed dramatically around the world. But I think it’s poised to continue its long streak of outperformance in the years ahead.
A temporary setback
Visa makes its money from the fees it charges on credit and debit card transactions, so it comes as no surprise that reduced spending caused by high unemployment and an economic slowdown means less revenue for the payments company.
During Visa’s fiscal third quarter (ended June 30) and fourth quarter (ended Sept. 30), sales fell 17% from the prior-year periods. Unlike many high-flying technology companies that were boosted by accelerating digital trends, Visa’s financial tollbooth saw less traffic as less money switched hands. But business improved as the year progressed. Visa’s payments volume, which was down 10% in Q3, turned positive to 4% growth in Q4.
One very important revenue generator, however, is still exhibiting material weakness. Money that Visa earns for processing cross-border transactions, called international transaction fees, dropped 19% in fiscal 2020. This was the only revenue segment that was negative for the 12-month period, and the uncertainty surrounding a recovery in travel and tourism could keep it under pressure for some time. This segment accounted for 29% of Visa’s total revenue in fiscal 2020 ands 34% in fiscal 2019.
Regardless, Visa has an impressive financial profile and extremely high margins that can protect it during temporary downturns that put a strain on sales. Even after returning $3.9 billion to shareholders in the form of dividends and buybacks during the last two quarters of fiscal 2020, the company had $16.3 billion of cash sitting on its balance sheet. Visa is weathering the storm.
Still an outstanding company
Visa is arguably one of the best businesses in the world. As the operator of a global payments system, it benefits from the strongest competitive advantage any company can have — a network effect, in which each new user makes the system more valuable to all the others. Furthermore, Visa is riding the secular shift to a cashless society because its infrastructure is vital to the functioning of worldwide commerce. This entrenches it in a position of power, and its historical financial performance bears it out.
Visa went from generating $10.4 billion in revenue in fiscal 2012 to making $10.9 billion in profit in its most recent fiscal year. However, what’s most amazing about the company is how little capital it needs to grow. Any additional transaction processed by Visa basically costs the company nothing, and this will drive its already high margins even higher in the future.
As Visa continues to spearhead the war on cash in order to push digital payments all over the world, shareholders will be rewarded. The coronavirus pandemic’s negative impact on global commerce will prove to be short-lived, but its effect on people’s willingness to handle cash will be permanent.
Although the stock has trailed the overall market over the past year or so, Visa is a company that investors should own for the long term. I’m confident that it will be a winner for many years to come.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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