This Fintech Stock Is Cheaper Than You Think

Priced at nearly 29 times trailing 12-month earnings, shares of Visa (W -0.54%) can’t quite be considered cheap… on the surface.

When considering factors other than its recent earnings, however, this fintech name becomes a much more compelling investment prospect. In fact, the well-rounded outfit deserves a place in far more people’s portfolios, possibly including yours.

There are 3 reasons why Visa shares are worth every penny

You read that correctly. Visa is a fintech stock. While its roots are from a credit card middleman, it has evolved into so much more. Cryptocurrencies, data analysis and non-card-based payment solutions are all in the wheelhouse.

But that’s not why this stock, priced at nearly 30 times trailing earnings per share, can be considered “cheap.” Three other shades actually make this superficially expensive stock a relative bargain.

The first of these three measures is raw growth – past and projected. Last year’s top and bottom lines were both up more than 20%, and while revenue growth slowed during the most recently ended quarter, the company’s trucking earnings growth held at a clip of 21%. Analysts are collectively calling for sales growth of more than 10% this full year before accelerating to more than 11% next year, with earnings growth projected to top those steps.

The thing is, this rate of growth is simply more of the same for Visa.

V Revenue data (quarterly) by YCharts

The other reason you don’t pay as much as it seems to own a piece of Visa is the reliable health of your balance sheet and income statement.

Take the income statement as an example. About half of the income is converted into income. It’s huge. In comparison S&P 500‘s average net profit margin rate is closer to 11%, according to data from FactSet. At the same time, Visa doesn’t need to use a lot of leverage, meaning it doesn’t need to take on a ton of debt to drive this level of earnings. At the end of last year, the $476 billion company was servicing only $20.5 billion worth of long-term debt. And with roughly $15 billion in cash or cash equivalents in the bank right now, it could theoretically pay off the bulk of its debt if it chose to.

The bottom line is that the bulk of what you pay for when you buy shares in Visa is a net market value in the event of a liquidation or acquisition (not that either is on the radar). This is not the case with many other stocks.

Finally, perhaps the most important reason why a price-to-earnings ratio of nearly 30 isn’t an outrageous valuation is the fact that you should expect to pay a bit of a premium for the kind of consistency Visa exhibits.

Visa’s annual top and bottom lines have been growing at a reliable double-digit pace for some time, and should continue to do so for the foreseeable future. But the explanation and outlook understate how consistent this company’s growth is. Take a look at sales and earnings that have declined in recent years. Barring the pandemic-triggered disruption in 2020, Visa has been a fiscal juggernaut since it went public in 2008.

V Revenue data (quarterly) by YCharts

It wouldn’t be out of line to suggest that Visa has been one of the market’s most consistent growers over the past decade, quadrupling its top and bottom lines during that time frame. Of course, this kind of reliability deserves above-average prices.

Being stingy can cost you

Do not misunderstand. You may well enter Visa stock at a lower value at some point in the future. It also never hurts to wait for market-wide weakness to temporarily pull the price of a quality stock down and jump in then.

However, as Robert Burton put it, let’s not be penny-wise and pound-foolish. Visa shares typically have an apparent premium even when they are down. If you’re waiting for a trailing price-to-earnings ratio below 20, you’ll probably never see it—we haven’t seen this stock priced below a P/E of 25 in years.

The bottom line? If you are interested in entering, there is no particular benefit to waiting. Given the stock’s recent bullish action, actually waiting could turn out to be a costly mistake.