Growth Is In The Cards
In this edition of the Smart Investor newsletter, we examine the stock of one of the most profitable companies in the world. Although we have placed several stocks under review, we are not selling any this week due to thin trading around the holidays and general market uncertainty going into the new year. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ The U.K. Competition and Markets Authority (CMA) announced it is investigating whether IBM’s (IBM) planned acquisition of cloud software provider HashiCorp would harm competition. The buyout, proposed in April 2024, aims to expand IBM’s cloud-based software offerings amid rising demand for AI applications and was initially expected to close by the end of the year. However, due to the ongoing antitrust probe by the Federal Trade Commission (FTC), the companies now anticipate completing the acquisition in early 2025, subject to further review by U.K. regulators.
❖ Another company falling under foreign regulators’ watchful eyes last week was Uber Technologies (UBER). Taiwan’s Fair Trade Commission has blocked the ride-sharing leader’s proposed $950 million acquisition of Delivery Hero’s Foodpanda business on competitive concerns. The Taiwanese regulator noted that the merger would eliminate Foodpanda as Uber Eats’ main competitor, potentially leading to higher prices for consumers and increased commissions for restaurants. The acquisition was intended to strengthen Uber’s presence in Taiwan by consolidating market share. With the deal blocked, Uber will need to explore alternative strategies to expand its footprint in the Taiwanese market.
❖ Apple requested to participate in the U.S. Department of Justice’s antitrust trial against Alphabet’s (GOOGL) Google to defend its revenue-sharing agreement, which provides Apple billions of dollars annually for making Google the default search engine on its devices. The iPhone maker stated it does not plan to build its own search engine to compete with Google, regardless of the trial’s outcome. Apple intends to call witnesses at the April trial, underscoring its vested interest in maintaining the agreement.
❖ Interactive Brokers (IBKR) has been the Smart Portfolio’s best performer in 2024, boasting an annual gain of almost 116% and rising by over 47.5% since we purchased the stock in in June 2024. The second place in the performance table is occupied by EMCOR Group (EME), which gained over 112% in 2024 and added almost 120% since we bought it in November 2023. Texas Pacific Land Corporation (TPL) comes in third with a 111% increase in 2024 and an 89% gain since purchase for the Portfolio in June 2024. The three performance leaders are followed by Broadcom (AVGO), Howmet Aerospace (HWM), Taiwan Semiconductor Manufacturing (TSM), Arista Networks (ANET), and KKR & Co. (KKR). The Portfolio’s best-performing stocks belong to vastly different economic sectors and industries, underscoring the importance of diversification.
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Portfolio Stocks Under Review
❖ Arch Capital Group (ACGL) remains under review as we witness contrasting developments around the stock. As a reminder, we placed it in the “review” bracket following the stock’s strong decline from its peak in October, which was likely caused by pressures on the larger insurance-stock universe and profit taking following its strong run this year through mid-October, when it reached an all-time high.
In positive developments for ACGL stock, the company renewed its $1 billion share repurchase program, allowing for buybacks through open market or privately negotiated transactions. As of September 30, 2024, the full $1 billion remained available, with no common shares repurchased in Q4 2024.
Additionally, Moody’s upgraded Arch Capital Group’s credit rating to “A3” from “Baa1” and also raised the company’s insurance financial strength (IFS) ratings. According to the agency, the upgrades reflect ACGL’s robust profitability metrics and solid risk-adjusted capitalization and are underpinned by the firm’s improved market position and scale. These upgrades indicate Moody’s increased confidence in Arch Capital’s financial strength and operational performance.
Analysts from leading Wall Street firms rate Arch Capital a “Buy” with an average price target implying an upside of over 30% in the next 12 months. However, Jefferies analysts reduced ACGL’s price target, citing caution on commercial line insurance due to less favorable conditions and uncertainties in that segment. Still, the firm maintained a “Buy” rating on ACGL, reflecting confidence in the company’s ability to capitalize on improving trends in personal lines and its strong overall position in the property and casualty insurance sector. We plan to continue watching the stock closely, ready to sell if there is a hint of trouble.
❖ GE Aerospace (GE) remains under review. One of the Smart Portfolio’s longest-held stocks, it had been our star performer until mid-October, when it reached an all-time high. Since then, the stock has been under pressure, both from the general Industrial sector underperformance over that period, and due to investor worries – based on market dynamics and company-specific issues like supply chain constraints – that GE shares may have outrun their fundamentals.
Trump’s plans to slash government spending have weighed on firms like GE. However, GE’s low exposure to the U.S. government’s defense spending should alleviate these concerns. The company derives about 16% of its revenues from defense-related activities, with the lion’s share of the total – over 70% – coming from services, a recurring, resilient, and higher-margin source of revenue.
Leading Wall Street firms rate GE Aerospace a “Strong Buy” with an average price target implying an upside of over 26% in the next 12 months. According to analysts, recent worries about aftermarket services growth are overblown, and GE remains fundamentally strong with robust prospects in both the aftermarket and OE segments. The company’s strong performance in Q3 and a hike to its full-year EPS and cash flow guidance are a testament to this strength.
We believe that GE remains a solid investment, which took a hit along with the broader industry and was impacted by investor anxiety as a result of the stock’s price appreciation. However, we plan to follow the company news closely going forward to understand whether the sentiment has improved.
❖ NICE (NICE) remains under review for a potential sale following a sharp negative market reaction to an analyst downgrade, indicating the possibility of continued downward momentum. In the near term, negative investor sentiment may outweigh NICE’s strong long-term growth potential.
Jefferies analysts recently downgraded NICE from “Buy” to “Hold,” lowering their price target by $15. According to Jefferies, consensus estimates for NICE’s cloud revenue growth in 2025 are overly optimistic, particularly given the increasing competition in the sector. Additionally, the upcoming CEO transition at NICE introduces potential uncertainties, with analysts noting that the leadership change could impact the company’s strategic direction and execution.
Conversely, Morgan Stanley has highlighted NICE as one of its top picks in the communication software space. The firm recently raised its price target on NICE, citing the anticipated reacceleration of industry stocks. Morgan Stanley believes this environment favors companies with “accelerating growth stories or exceptional free cash flow support.” NICE’s strong fundamentals and growth prospects position it well to benefit from these trends.
Overall, the average price target from leading Wall Street analysts suggests an upside of over 48% for NICE stock within the next 12 months. However, the stock has exhibited downward momentum over the past month. We will closely monitor its performance to assess whether a positive breakout is likely.
❖ We are placing Verizon Communications (VZ) under review following its weak stock performance over the past couple of months. While the stock has several positive factors in its favor, challenges persist that could weigh on its performance.
Verizon remains a leading provider in the wireless sector, with potential benefits from the ongoing 5G expansion. The company has demonstrated resilience by improving wireless service revenues and growing its subscriber base despite intense competition. These gains reflect effective strategies in customer retention and acquisition, helping Verizon defend its market share. However, intense competition continues to pressure profitability as promotions targeting new customers challenge Verizon’s ability to balance pricing strategies with revenue growth, limiting room for margin expansion.
The proposed $20 billion acquisition of Frontier Communications is a potentially transformative development. This deal aims to expand Verizon’s fiber-optic network and broadband reach, particularly in underserved markets, enhancing growth prospects beyond its core wireless business. Verizon’s CEO has expressed confidence in receiving regulatory approval, highlighting the alignment of the deal with the national goal of improving broadband infrastructure. However, anticipated benefits from the acquisition are not expected to fully materialize until early 2026, delaying a key growth driver.
Verizon’s strategic initiatives, including ongoing restructuring efforts and asset management strategies such as the tower operating deal with Vertical Bridge, are expected to improve long-term operational efficiency and financial stability. While these moves provide stability, their immediate impact on free cash flow and profitability appears moderate, with significant benefits likely to materialize over time.
On a more definitively positive note, VZ’s partnership with Nvidia to develop a new AI-powered private 5G platform infrastructure could position the company as a key player in the enterprise connectivity market. This collaboration has the potential to diversify Verizon’s revenue streams beyond traditional wireless services. The plug-and-play private 5G network solution is designed to attract high-value enterprise customers with tailored, high-performance connectivity applications. If successfully implemented, this initiative could unlock new revenue channels, enhance Verizon’s reputation as a leader in enterprise and network solutions, and strengthen its financial outlook. However, investors may remain cautious until the platform is demonstrated in 2025 and its adoption by enterprises is proven, especially given muted sentiment towards the stock.
Leading Wall Street analysts rate Verizon as a “Buy,” with an average price target suggesting a potential upside of over 18% within the next 12 months. However, Bank of America Securities and JPMorgan analysts recently reiterated their “Hold” ratings, reflecting a balanced view of Verizon’s long-term potential and near-term challenges. We plan to closely monitor these developments to determine whether to retain the stock in the portfolio.
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Portfolio Earnings and Dividend Calendar
❖ The Q3 2024 earnings season is over, and no Smart Portfolio companies are scheduled to release their quarterly results until mid-January.
❖ The ex-dividend date for Cisco Systems (CSCO) is January 3rd.
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New Buy: Visa (V)
Visa Inc. is an American multinational payment services corporation headquartered in the San Francisco Bay Area. Visa is a global leader in digital payments, operating the world’s largest credit and debit card network.
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The Making of a Giant
Visa Inc. traces its origins to 1958, when Bank of America launched the BankAmericard credit card program, introducing the first all-purpose credit card. Over the following years, the program expanded as various banks licensed it, forming a network across the U.S. In 1976, the program was rebranded as “Visa,” reflecting its global ambitions. A restructuring in 2007 led to the incorporation of Visa Inc., and in 2008, the company went public in what was then the largest IPO in U.S. history.
In the past decade, Visa has significantly grown its revenue and market capitalization through strategic acquisitions, partnerships, and technological advancements. Notable acquisitions include Plaid (financial data aggregation), Currencycloud (cross-border payments), Tink (European open banking), Pismo (issuer processing), and Prosa (Mexican payment processing).
In fiscal Q1 2025, Visa completed its acquisition of Featurespace, a leader in AI-driven payments protection technology, further strengthening its capabilities in real-time fraud detection and financial crime prevention. These moves have expanded Visa’s technological capabilities, geographic footprint, and service offerings.
Today, Visa Inc. is among the world’s largest corporations, with a market capitalization of $621 billion and trailing 12-month (TTM) revenues of approximately $36 billion. The company ranks #135 on the Fortune 500 list of the largest U.S. companies and processes payments across more than 200 countries and territories.
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Global Payments Duopoly
Visa, along with Mastercard, continues to dominate the global payments industry, collectively accounting for approximately 90% of all payment processing outside of China. In 2024, Visa further strengthened its position, driven by the global shift toward digital payments. With over 4.5 billion Visa cards in circulation, the company remains the largest payment network in the world.
Visa’s initiatives in financial inclusion have been particularly impactful. By partnering with governments and financial institutions and heavily investing in infrastructure expansion, Visa has extended cashless payment systems to underserved regions, especially in emerging markets. These efforts have significantly expanded Visa’s cardholder base and transaction volumes. Emerging markets, where cash usage is rapidly declining, continue to present substantial growth opportunities for Visa as digital adoption accelerates.
In addition, Visa developed partnerships with central banks to facilitate the development of Central Bank Digital Currencies (CBDCs) and their integration into its existing payment infrastructure. By integrating CBDCs into its existing networks, Visa can maintain its role in processing and securing transactions, even as governments adopt digital currencies, and tap into new revenue streams from CBDC-related transaction processing and associated services. Moreover, CBDCs integration reinforces network effects, while strengthening V’s position as a trusted intermediary between financial institutions, governments, and consumers.
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Partnerships and Ecosystem Dominance
Visa’s market leadership is underpinned by its commitment to technological innovation and strategic collaborations. The company has continually enhanced its VisaNet platform, leveraging artificial intelligence (AI) and machine learning (ML) to improve transaction speed, security, and fraud detection. Visa has also embraced blockchain technology and tokenization, enabling crypto-linked cards and secure digital wallet transactions.
Key partnerships with Apple Pay, Google Pay, PayPal, Coinbase, and other fintech players have solidified Visa’s role as the backbone of the digital payments ecosystem. These collaborations ensure Visa’s relevance in an evolving market while allowing it to maintain dominance in both traditional and emerging payment technologies.
By adopting a strategy of collaboration rather than competition, Visa has positioned itself as a crucial partner for fintech companies. These partnerships, combined with Visa’s global network and robust technological infrastructure, continue to drive its growth and ensure its dominance in the fast-evolving digital payments landscape.
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Winning Business Model
Visa’s business model is widely regarded as a benchmark for scalability, efficiency, and resilience. In fiscal 2024 (ended on September 30th), the company processed over 233 billion transactions, facilitating $16 trillion in payments volume across more than 200 countries and territories. Visa generates revenue through transaction processing fees, service fees, licensing, and other charges. By operating solely as a payments intermediary, Visa avoids direct credit risk, providing a robust foundation for its operations.
Scalability lies at the core of Visa’s success. The company’s infrastructure is designed to handle vast transaction volumes with minimal incremental costs. This operational leverage means that as more transactions flow through Visa’s network, revenues increase substantially without a corresponding rise in expenses. This efficiency has helped Visa maintain its position as a cost-effective operator with exceptional profitability.
Another hallmark of Visa’s business model is its natural resistance to inflation. As its revenue model is percentage-based, fees automatically grow alongside the value of transactions, ensuring a steady increase in top-line performance even in inflationary environments. Coupled with this, Visa consistently delivers industry-leading profit margins due to its asset-light approach and continuous investment in technology. By enhancing processing efficiency and fraud detection while keeping operational costs low, Visa ensures that its profitability remains strong.
Underpinning all of this is Visa’s vast global network, which connects over 14,500 financial institutions. This creates a powerful network effect, where the system becomes increasingly valuable as more consumers, merchants, and banks participate. These dynamics reinforce Visa’s dominance and make it exceptionally difficult for competitors to replicate its scale and reach. These attributes not only protect Visa’s business during periods of economic uncertainty, but also position it for sustained growth in a world increasingly transitioning to digital payments.
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Legal and Regulatory Developments
Visa has faced growing regulatory scrutiny over its interchange fees, or “swipe fees,” which merchants pay for card transaction processing. These fees, a significant revenue driver, have been criticized by regulators and merchants as excessively high and anti-competitive.
In June 2024, a federal judge rejected a proposed $30 billion antitrust settlement related to these fees, prolonging nearly two decades of legal disputes. Additionally, the U.S. Department of Justice filed an antitrust lawsuit in September 2024, alleging Visa engaged in monopolistic practices in the debit card market. Visa has strongly denied the claims and said it intends to defend itself vigorously. Meanwhile, in Europe, Visa agreed to extend fee caps on non-EU card transactions until 2029.
While settlement costs and potential fee caps could modestly impact short-term revenue growth, these challenges are manageable. Visa’s scalable business model, inflation-linked revenue streams, and strong market position provide significant financial resilience. Moreover, the company’s proactive financial planning, including a $1.5 billion escrow deposit to address potential liabilities, underscores its ability to navigate regulatory risks while maintaining operational stability and shareholder value.
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Shareholder-Friendly Cash Machine
Visa demonstrates stellar financial health, highlighted by its minimal net debt-to-equity ratio and positive net interest income, as the company consistently earns more interest than it pays. V’s capital efficiency metrics, including ROE, ROA, and ROIC, rank among the highest across all sectors, not just the Financials industry. While its gross margin places it in the top 25% of its industry, Visa’s operating and free cash flow (FCF) margins are significantly higher, and its net profit margin positions the company among the top 10 most profitable firms globally.
Visa consistently generates robust free cash flow, which it deploys for strategic investments, buybacks, and dividends, creating substantial shareholder value. Although Visa’s FCF declined slightly in fiscal year 2024 compared to FY 2023, this was primarily due to increased investments in technology and infrastructure to support long-term growth, and a notable rise in share repurchases.
As part of its capital allocation strategy, Visa returns nearly all of its free cash flow to shareholders, with a stronger emphasis on buybacks. In fiscal year 2024, Visa repurchased approximately 3.5% of its outstanding shares, amounting to $16.7 billion. Building on this momentum, in October 2024, Visa’s board approved a new $25 billion share repurchase program with no expiration date, representing approximately 5% of the company’s outstanding shares.
Simultaneously, Visa increased its dividend payout by 13.5%, marking its 17th consecutive annual dividend hike. While Visa’s current dividend yield is a modest 0.7%, its strong cash flow generation and low payout ratio ensure ample room for future increases. Over the past decade, Visa’s dividend has grown at a CAGR of nearly 18%, underscoring its commitment to returning value to shareholders through a balanced and sustainable capital allocation strategy.
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Proving Skeptics Wrong
The Smart Investor Portfolio previously held Visa but sold it in July 2024 after the company reported a slight revenue miss in FQ3—a rare occurrence for this financial stalwart. Though earnings met estimates, the revenue shortfall drew criticism from Wall Street, which anticipated turbulence in the stock due to high investor expectations. Visa’s FQ3 results marked the first time the company missed analysts’ revenue projections, though it maintained its perfect track record for EPS. This led to debates over whether Visa could achieve its full-year fiscal 2024 targets.
However, Visa proved skeptics (and us) wrong as the year progressed, delivering better-than-expected results in both FQ4 and the full fiscal year. For FY 2024, Visa’s revenue grew by 10% year-over-year, while non-GAAP EPS increased by 15%. These growth rates mirrored those of FY 2023, underscoring the company’s consistency. Looking ahead, Visa projects FQ1 2025 revenue growth in the high single digits and FY 2025 revenue growth in the high single to low double digits. EPS is expected to grow by double digits in both FQ1 and FY 2025, reflecting ongoing stability.
Visa’s stock, a component of both the S&P 500 and the Dow Jones Industrial Average, gained approximately 23% in 2024. While it strongly outperformed the DJIA, it slightly lagged the broader large-cap benchmark. Despite this robust performance, Visa remains attractively valued compared to its U.S. payment-processing peers. Its unmatched profitability, projected earnings growth, dividend increases, and aggressive share buybacks support our assessment of V’s valuation as moderate.
December 2024 saw several analysts, including those from BMO Capital, Jefferies, and Oppenheimer, upgrading their price targets for Visa. Analysts cited the company’s significant investments in technology and digital payment solutions, as well as its expanding partnerships, as key drivers of future growth. Visa’s trajectory includes deepening its integration with emerging technologies such as generative AI and digital identity, reinforcing its market-leading position.
Moreover, Visa’s consistent financial performance and capital allocation strategies, including its robust share repurchase program and dividend increases, have been widely praised. The company’s strong market position and agility enable it to effectively capitalize on the ongoing shift toward digital payments and blockchain-based transactions, ensuring its long-term growth and relevance in the evolving payments ecosystem.
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Investing Takeaway
Visa Inc. is the backbone of global payments, operating the largest credit and debit card network worldwide. Its asset-light business model ensures high profitability, scalability, and inflation-resistant revenue growth. Strategic investments in AI, blockchain, and digital identity, alongside acquisitions, reinforce Visa’s technological edge and market leadership. Partnerships with leading fintechs and central banks strengthen its ecosystem dominance. Visa’s financial health is reflected in industry-leading efficiency metrics, while its operating and net profit margins underscore exceptional profitability. Robust free cash flow supports investments, buybacks, and consistent dividend growth, creating substantial shareholder value. Visa’s steady performance, attractive valuation, and ability to capitalize on the global shift to digital payments make it a resilient and compelling long-term investment.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Despite the volatility in the markets in the past week, our exclusive club’s ranks remained unchanged except for the movements within the Winners’ cohort, still including 16 stocks: AVGO, GE, ANET, EME, TSM, ORCL, TPL, HWM, PH, APH, IBKR, ITT, PNR, CRM, PYPL, and KKR.
The first contender is still AMZN with 22.19% gain since purchase. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
