Is Visa Stock a Buy?

Visa (NYSE: V) has long been a winner for its investors, but in recent years, the stock has lagged behind the market benchmark S&P 500 . Now, the world's largest payments company is dealing with a new challenge: regulatory scrutiny, as the U.S. Department of Justice accuses Visa of monopolizing debit network markets.

Whenever a company faces allegations of misconduct, investors should take notice, so let's examine the claims against Visa and review its recent financial performance to determine whether its stock is a buy, sell, or hold.

What's going on with Visa's legal challenges?

In September, the Justice Department filed an antitrust lawsuit against Visa, alleging that the company used its influence to stifle existing competitors and block the development of new, innovative alternatives. Specifically, the complaint states that Visa processes more than 60% of debit transactions in the U.S., generating more than $7 billion annually in fees. It also claims that Visa unlawfully preserves its monopoly by shielding itself from competition.

Visa's general counsel, Julie Rottenberg, described the lawsuit as "meritless" and said, "We will vigorously defend ourselves." Rottenberg pointed to the increasing number of competitors and the variety of options available to consumers at checkout, both in stores and online, as support for Visa's defense.

This new lawsuit came after a judge struck down a settlement between card networks and merchants that would have saved the latter an estimated $30 billion on credit and debit card transactions. Visa and competitor Mastercard (NYSE: MA) reached an agreement with merchants in March, ending almost 20 years of legal disputes over these fees. However, now the parties must either renegotiate or go to trial. While the card networks called the deal "fair" and "appropriate," some merchants argued that the swipe fees remained too high.

These cases could continue for the foreseeable future and will likely cost the company in legal fees and possible settlements. To that point, the company added $1.5 billion to its litigation escrow account in September in addition to the $1.6 billion it had at the end of its most recently reported quarter.

Visa continues setting financial records

Despite Visa's legal concerns, the company posted record quarterly net revenue of $8.9 billion and a near-record net income of $4.9 billion. Those quarterly results (for the period ended June 30) represented year-over-year growth of 10% and 17%, respectively.

What sets Visa apart from Mastercard is its operating margin , a metric demonstrating a company's operating profit after accounting for operating expenses and cost of goods sold. During the trailing 12 months, Visa had an operating margin of 67% compared to Mastercard's 58.6%. It is rare to find a company's operating margin higher than 50%, let alone close to 70%, which may be an argument made by the Justice Department in its antitrust lawsuit against Visa.

Looking ahead to Visa's fiscal Q4 2024, management previously projected "low double-digit" percentage revenue growth and the "high end of low double-digit" earnings-per-share growth compared to its fiscal Q4 2023.

V Operating Margin (TTM) data by YCharts

Visa prioritizes its shareholders

Visa's strong earnings results allow management to return an incredible amount of capital to shareholders through dividends and share repurchases .

First, the company has paid a dividend since going public in 2008 and currently pays a quarterly dividend of $0.52 per share, equating to an annual yield of 0.73%. While the yield may appear unimpressive on the surface, Visa has a strong track record of raising its dividend -- 15 years and counting -- and management typically announces the following year's raise with its fiscal year earnings, which are schedule for release on Oct. 29.

Second, Visa constantly repurchases its stock, giving existing shareholders a larger ownership percentage without purchasing additional shares. Management has repurchased nearly 11% of its shares outstanding during the past five years, lowering its share count to 1.95 billion. Zooming in, management has accelerated its share repurchases in 2024, buying back 5.3% of its shares, suggesting that management believes the stock is undervalued.

V Dividend data by YCharts

Is Visa undervalued?

Turning our attention to Visa's valuation, the company currently trades at a price-to-earnings (P/E) ratio of 30.4. This metric compares a company's stock price to its trailing 12 months of earnings, and it is useful when comparing a stock to its historical levels and against competitors.

Visa historically trades at a lower P/E ratio than competitor Mastercard, which trades at 39.2 times earnings, in part due to lower revenue and net income compound annual growth rates . However, when comparing historical P/E ratios, Visa stock is below its five-year median of 32.2, whereas Mastercard is above its five-year median of 38.0.

To summarize, Visa's valuation appears to be lower than its baseline, but it's not trading at fire sale prices.

V PE Ratio data by YCharts

Is Visa a buy, sell, or hold?

Anytime a company faces uncertainty, like the threat of the Justice Department disrupting a business model or, at the very least, its margins, investors should rightfully examine the business. Several scenarios can play out, like an order prohibiting future anticompetitive practices, hefty fines, or nothing at all if Visa can defend itself successfully. Given that the case could take years to play out and the unknown outcome, sometimes the smartest move an investor can take is to do nothing at all and continue to hold a market-leading company.

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Collin Brantmeyer has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy .