Is Visa One of the Top Stocks to Buy?

Visa is definitely a greatcompany. As operator of the world's largest payment processing network, Visa has grown at an impressive rate since going public in 2008. In fact, Visa's revenue has grown by an average of 15% per year since that time, and that includes one of the worst recessions in history.. However, in order for Visa to be a great stock, we need to make sure that the future potential justifies the current price. Here are some of the reasons to like and dislike Visa, and to determine whether or not there are better choices elsewhere.

Strong growth, endless possibilitiesAs I mentioned, Visa operates the world's largest payment processing network, which processed more than $1.2 trillion worth of transactions in 2014. From its network, Visa derives three main sources of revenue: service fees (40%), data processing fees (35%), and international transaction fees (25%).

There are plenty of reasons to like Visa. Revenue has grown by 280% over the past decade, and last year's return on equity of 20% is the highest it's been in Visa's short history as a public company.As of the most recent earnings report, Visa's revenue rose by 7% year over year, which resulted in a 15% annual increase in EPS.

There is virtually endless possibility for growth in the years and decades ahead. The world is transitioning to a cashless society, and one of Visa' goals is to develop new payment technologies to capitalize on this. Because 85% of transactions are still conducted in cash worldwide, there's no shortage of opportunity. Plus, 2.9 billion people around the globe are expected to join the middle class by the year 2030.

Not only will there be a greater demand for payment processing, but the individuals making those payments will have more money to spend, which translates into higher processing fees.

It looks a little too expensiveMy only issue with Visa as an investment is that it looks too expensive. The company projects "low double-digit revenue growth" going forward, but shares trade for 25.6times 2015's expected earnings. Shares are up 31.1%during the past year, and I'm having trouble fully justifying the current valuation.

As a dividend stock, Visa leaves a lot to be desired. Although the dividend has increased by 260% since 2009,an annual yield of 0.7% isn't likely to attract income investors anytime soon. Visa does have a solid share buyback program, and repurchased $803 millionin stock during the past quarter alone; but many investors just like their stocks to pay dividends.

Are there better choices out there?Even though rival MasterCard trades for 25.5 times forward earnings, virtually the exact same as Visa,I have a more optimistic view of its future growth potential, simply because, as a smaller company (market cap of $101.7 billion vs. $162.9 billion),there's more room to expand. Plus, MasterCard is taking a more active role than Visa in the transition to a cashless society, especially in international markets with its "cashless journey" project, which is meant to track worldwide progress toward cashless economies and to evaluate the readiness of those economies to go cashless.Still, MasterCard looks too expensive at its current valuation, just like Visa does.

In the payment processing space, my personal preference right now is American Express , which controls not only the payment processing side of its business, but also functions as the "lender" to its credit card customers. After losing its exclusivity agreements with Costcoand JetBlue, shares have dropped 14.5% so far in 2015, despite the company's projection of 10%-15% annual earnings growth for the foreseeable future right on par with Visa and MasterCard.

American Express has the additional risk of borrowers defaulting on debts; but I still think the risks are more than justified by the reward potential since it's valuation is so much lower. As of this writing, American Express trades for just 14.5 times forward earnings, which is low for a company projecting double-digit growth.

Thus, to get back to the answer to the original question, I don't believe Visa is one of the best stocks to buy -- at least right now. Having said that, it is certainly one of the best companies in the world. For the right price it could become a buy once again.

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Matthew Frankel owns shares of American Express. The Motley Fool recommends American Express, Costco Wholesale, MasterCard, and Visa. The Motley Fool owns shares of Costco Wholesale, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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