Warren Buffett is arguably the world’s most renowned investor and with good reason. From 1965 to 2020, Buffett’s holding company, Berkshire Hathaway, has achieved a compounded annual return of 20.0%. In the same period, the S&P 500 gained 10.2%. It comes as no surprise that Buffett’s stock picks are watched keenly by all sorts of investors, including me. While there are many great companies Berkshire has endorsed through investment, I have my eye on one in particular that it has a relatively small position in.
Hidden in plain sight
Sometimes there is nothing either mysterious or hidden about true value. Like many other people, I am a holder of just one of 1.7bn Visa (NYSE: V) cards in circulation worldwide. A simple look into my wallet reveals the iconic logo that has become synonymous with payments the world over. With 188bn transactions processed in 2020, Visa outstripped its nearest competitor (Chinese giant, UnionPay) by almost 40bn transactions. This makes it the largest payment card network processor in the world.
Buffett’s Berkshire Hathaway currently has just 0.5% of its portfolio in this stock. Visa is therefore one of its smallest holdings. I won’t go into why I think this may be the case. I will say though, that Visa’s numbers suggest a very strong competitive advantage.
Processing payments and profits
By just looking at the profit margins on this business, I can see why Buffett picked it. Over the past 10 years, Visa has consistently grossed 80%. In turn, net profits consistently come in between 40% and 50% of total revenues of $24bn. There are simply not a lot of businesses of Visa’s size that can achieve this – almost none in fact. For investors, the beauty is that Visa is expected to rake in revenues of $28bn in 2022. In 2021, the company generated $15bn in free cash flow. Free cash flow is a metric beloved by value investors as it is a strong indicator of the ability of the business to pay its debts, reinvest in the business, and pay dividends to its investors.
Visa, Mastercard, American Express, and Paypal have literally been locked in a contest for global dominance since as early as the 1960s. However, as recently as 2013 a threat has arisen in the East in the form of UnionPay. The Chinese-owned giant has 70% market share in Asia-Pacific. Despite having been around for less than a decade, it is already the second-largest processor worldwide by purchase transactions. The advent of more and more new technologies has expanded an already growing research and development budget for Visa and its competitors. It’s also worth noting that Buffett trimmed his position in Visa by 4.3% as recently as November 2021.
Looking into the future
While the industry continues to grow, it’s clear that Visa’s dominance will mean it can grow to keep up. This was shown by how quickly it pivoted its systems to accommodate cryptocurrencies. Visa has a truly rare competitive edge that I think will last well into the future. Buffett recognised this and I’m betting he was right.
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Stephen Bhasera has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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