TIP791: Best Quality Stock Idea Q1 2026 w/ Clay Finck

“Visa operates as an information network that avoids all card issuance and lending risk. The company does not extend credit or issue cards themselves. They leave it to the banks to issue the cards and take on the credit risk. Think of players like Chase, Capital One, or Barclays. Visa operates as the payment network behind the scenes. There are 5 parties involved in every digital transaction: the consumer, the merchant, the issuing bank, the merchant's bank, and Visa.”

Business & Entrepreneurship · Strategy & Decision Making · Operations & Execution

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Network layer avoids balance sheet risk

“Kantesaria looks for a dominant business with pricing power, preferably companies that are in a monopoly or duopoly position. Lastly, he wants to purchase businesses that are capital light, meaning that they don't require massive R&D expenses or capital expenditures. He wants businesses that print cash that can then be distributed to shareholders through buybacks rather than making a splashy acquisition.”

Business & Entrepreneurship · Strategy & Decision Making

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Tech giants fail test due to reinvestment needs

“American Express's primary barrier is its closed-loop model. It requires the company to act as both the network and the bank, limiting its ability to partner with thousands of global financial institutions that work with Visa and MasterCard. Because Amex historically charges higher merchant fees to fund their premium rewards, many smaller or international businesses simply refuse to accept American Express. While Amex's rewards are attractive, they're financed by these higher merchant costs.”

Strategy & Decision Making · Business & Entrepreneurship

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Closed-loop limits partnerships and scale

“For a new entrant to truly disrupt this network effect, they wouldn't just need a better app or a faster chip. They would have to convince tens of millions of merchants and thousands of financial institutions to abandon a system that already works perfectly. Imagine that you built a new payment rail and you needed to start getting partners on board.”

Strategy & Decision Making · Business & Entrepreneurship

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Fintechs build on rails rather than replace

“Dev Kantesaria looks for businesses with predictability. If he can't predict where a business is likely to be in 10 years, then he's probably not interested in owning that company regardless of the potential for growth that lies ahead. He would rather sacrifice growth to ensure that he isn't likely to lose money over the next decade. He stated, we define quality as finding the perfect intersection between growth and predictability.”— Dev Kantesaria

Business & Entrepreneurship · Strategy & Decision Making · Economics & Markets

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Predictability over growth rate

“The two banks involved in this example, along with Visa, are collecting a fee on each transaction, and that fee tends to be around 2 to 3% in aggregate, which is paid by the merchant and not paid by the consumer. Visa is going to earn around 0.1% or 0.2%. So if we're looking at a $100 purchase, they're getting something like 13 cents, 15 cents, and it's a relatively small amount of the value captured.”

Economics & Markets · Strategy & Decision Making

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Merchants subsidize consumer rewards to access network

“In 1958, Bank of America mailed 60,000 live credit cards to unsuspecting residents in Fresno, California, in an attempt to jumpstart a payment network out of thin air. This was the birth of the BankAmericard, the very first consumer credit card with a revolving credit feature. While mailing unsolicited credit cards is illegal today, this was the creation of a new financial ecosystem.”

Business & Entrepreneurship · Strategy & Decision Making · History & Geopolitics

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Reckless distribution solved cold start problem

“In fiscal year 2025, Visa generated around $40 billion in revenue. Gross margins are 80%, operating margins are 60%. Over the past decade, revenues have compounded at around 11% and earnings per share has compounded at 17%. The business model scales incredibly well. They've built out their network and infrastructure, so each incremental transaction that flows through the top line comes at a very small additional cost. This drives powerful operating leverage over time.”

Economics & Markets · Business & Entrepreneurship

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EPS outgrows revenue due to operating leverage

“Despite cross-border transactions making up just 10% of Visa's payment volume, they account for more than one-third of revenue. Cross-border transactions are quite an integral part of Visa's business because of the increased complexity, risk, and the currency exchange involved. Visa's able to capture a higher fee than a domestic transaction. It tends to be around 3 times higher.”

Business & Entrepreneurship · Economics & Markets

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10% of volume, 33% of revenue

“In fiscal year 2025, Visa generated over $21 billion in free cash flow, and they deployed more than $18 billion into share repurchases. As a result, Visa retires nearly 3% of their shares outstanding each year. The vast majority of the cash flow that Visa generates is deployed into share repurchases rather than making splashy acquisitions.”

Business & Entrepreneurship · Strategy & Decision Making

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3% annual share retirement compounds value

“Although Visa's moat is strong, it does face competitive pressure in different markets around the world. In India, the government launched the Unified Payments Interface, which is a real-time system that moves money directly between bank accounts. We see something similar happening in Brazil where the central bank's payment system now accounts for nearly half of all payments in the country despite only launching in 2020.”

History & Geopolitics · Strategy & Decision Making

DUR_CONTEXTUAL

Governments building competing payment rails

“Chris Hohn from TCI Fund Management has an 18% position in Visa, and given that he manages north of $50 billion, this makes his Visa position worth over $9.5 billion. Hohn is an investor worth following because he showcased compounded annual returns of more than 18% per annum for more than 2 decades. That's around 9 percentage points better than the overall market. On the topic of network effects, Hohn stated, we found other barriers to entry such as network effects. Payments is one.”— Chris Hohn

Strategy & Decision Making · Business & Entrepreneurship

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Network becomes harder to replicate as it grows

“Today there is more than $11 trillion in consumer spending still happening in cash or checks, and Visa is well positioned to benefit from more of that spending transitioning to digital. This shift is being driven by the convenience of digital payments, the growth of e-commerce, and the rapid adoption of smartphones and internet access worldwide.”

Technology & Engineering · Business & Entrepreneurship

DUR_CONTEXTUAL

Visa as trust layer for machine payments

“President Trump urged US lawmakers to pass legislation to limit credit card interest rates to 10%. Ironically, Visa's stock was down 6% in the days after the announcement, but the irony is that credit card interest rates do not directly impact Visa's business because Visa doesn't lend money. They don't set interest rates, or earn interest income. Visa earns fees based on transaction volume and payment processing.”

Economics & Markets · Psychology & Behavior

DUR_EPHEMERAL

Market confused business model with banks