It’s true that Visa is more expensive than its peers, but I’ve calculated a more normalized set of valuations discounting the one-time litigation charge that affected the company’s 2012 results, and on those measures, Visa is valued quite similarly to MasterCard, a competitor half its size and with a very similar expectation of growth. You can read more of my reasoning by clicking here, but the gist of it is that I agree with my fellow Fools. Visa has a great shot at long-term outperformance.
Travis’ take
Visa’s real competitive advantage is in what’s known as a network effect. Payment processors require merchants to have customers with Visa and customers require merchants that take Visa Inc (NYSE:V). Starting a payment processor is a chicken and egg conundrum and would be a nightmare to execute. But once you’ve built a payment processor network, it feeds on itself, drawing more merchants as customers sign up and more customers as more merchants sign up.
To demonstrate the power of Visa’s network effect, think about how ubiquitous Visa has become. I went to a liquor store about a month ago that didn’t accept Visa, and I almost went into a tirade. How could a successful business not accept Visa? This is blasphemy, I thought.
As a result, Visa Inc (NYSE:V) has built a business that’s nearly impenetrable by outside forces, and like Sean pointed out, it doesn’t have to take credit risk. It’s an expensive stock at 20.7 times forward earnings, there’s no doubt about that, but great companies don’t come cheap, and neither does Visa.
I’ll happily go along with an outperform call, and I actually think the combination of both MasterCard and Visa is really the right way for individual investors to play this great space. For more on my outperform call, see my full article here.
The final call
That would indeed be a unanimous outperform CAPScall for Visa. Once again, the conclusion was the same for all three of us; however, the thinking that got us there took each of us down a different path. From Visa’s network effect, which feeds upon itself, as Travis points out, to Visa’s opportunity in non-cash transactions, according to Alex, and its incredible overseas opportunity coupled with its growing shareholder payback incentives, as I (Sean) noted, we are all led to believe Visa is the epitome of a buy-and hold selection.
If you’d like a glimpse into our previous CAPScalls, I’d encourage you to visit our TMFYoungGuns CAPS page, where we are currently outperforming the market by 459 points on 26 (soon to be 27) active picks.
The article Analysts Debate: Is Visa Still a Top Stock? originally appeared on Fool.com and is written by Sean Williams, Travis Hoium, and Alex Planes.
Fool contributors Sean Williams, Alex Planes, and Travis Hoium have no positions in any companies mentioned here. You can follow Sean at @TMFUltraLong, Alex on Twitter at @TMFBiggles, and Travis at @FlushDrawFool.The Motley Fool owns shares of Mastercard and recommends American Express, MasterCard, and Visa.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
