But there’s a reason that the market is willing to assign a higher multiple to Mastercard. As you would expect with asset-light businesses like the two largest payment networks, Mastercard and Visa convert a lot of revenue generated into operating profit. Both are impressive, but Visa’s 64% operating margin is slightly better than Mastercard’s 53%. Its return on invested capital is also significantly higher than Mastercard’s, signaling a better allocation of capital.
However, I do think Visa can grow free cash flow around 10% per year due to their expansion network infrastructure, their brand strength and talent management team. According to a MA report, U.S. retail sales rose 8.5% during this year’s holiday shopping season, powered by soaring e-commerce sales. As consumers have been increasingly spending on discretionary items and services restrained by the COVID-19 pandemic, credit card transactions are rising. In addition, according to The Conference Board, the consumer confidence index came in at 115.8 points in December, up from an upwardly revised 111.9 in November. Strong consumer confidence is expected to translate into more purchases, leading to greater use of credit cards. Moreover, consumer spending is expected to remain strong in 2022, despite a resurgence in COVID-19 infections, high prices, and reduced fiscal stimulus.
MA has a 5-year average annual growth rate of 15.55% and 11.33% over the past 3-years. This is important because levered free cash flow represents the cash that is left over after all the bills are paid. In 2020 V generated $8.23 billion in levered free cash flow which is an increase of $1.34 billion (19.42%) over the past 5-years and $867.2 million (11.77%) over the past 3-years.
Investors have many avenues of investing in the financial industry, it can be quite intimidating to make a portfolio decision. Two juggernauts in the finance world have been battling each other for market shares since the dawn of electronic payments. Between them, they account for 64 percent of the global consumer financing market. It is also noteworthy that Mastercard is expanding its debit business. MA disclosed at the company’s recent results briefing that its “debit share in the U.K. from low single digits to approximately one-third of the market” following recent wins.
MA has a 5-year average annual growth rate of 10.13% and 7.73% over the past 3-years. Over the past 5 years, the company has demonstrated remarkable financial performance. Its revenue has shown a consistent and strong growth, increasing from $20,609.00 million in 2018 to $31,831.00 million in the last 12 months in 2023, representing a compound annual growth rate of approximately 9%. The earnings per share (EPS) has been equally impressive, growing steadily from $4.42 to $7.88, reflecting the company’s ability to translate revenue growth into bottom-line success. The book value has seen a small upward trend, growing from $34,006.00 million in 2018 to $38,981.00 in the last twelve months, indicating a CAGR of approximately 3%.
Visa emphasized at the KBW Payments FinTech Conference on February 23, 2021 that “we’ve seen a real shift from cash to Visa debit cards at the point of sale” in calendar year 2020. Visa’s multiple strengths make it a compelling investment opportunity. The company’s robust network and technological capabilities have fueled a remarkable 15% annual growth in Earnings Per Share. This is further corroborated by Morning Consult’s 2023 survey, which highlights Visa’s strong brand and reputation, particularly in terms of consumer trust and favorability.
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V is estimated to increased its revenue by a CAGR of 13.5% over the next five years. Therefore, both companies are expected to post higher revenue growth moving forward. Notably, Visa is expected to grow even faster than its historical averages suggest.
Both stocks rode the flight to quality strongly, with V stock leading the way. However, the momentum started to wane in July/August as both stocks fell. Both stocks trail the SPDR S&P 500 ETF’s 18.3% YTD gain (SPY) by a wide margin.
Although the company’s top line and bottom line were both down YoY in the first quarter of fiscal 2021, Visa’s financial performance exceeded market expectations. I analyze Visa, Inc. in this section of the article by evaluating the company’s recent quarterly financial results and highlighting three key areas where V is differentiated from Mastercard Incorporated. In the current month, Visa announced the launch of the “Visa Eco Benefits” package, which it intends to roll out in 2022. The package is designed to offer sustainability-focused benefits for account issuers. This is a one-of-a-kind offering that puts Visa in the driver’s seat for promoting sustainable commerce and climate action in the payments industry. The company faces competition from other card networks such as Mastercard (MA) and American Express (AXP), as well as fintech platforms like PayPal (PYPL) and Square (SQ).
V has a market cap of almost $500 billion and its share price has increased by almost 180% over the past 5 years. V could certainly continue to appreciate in value but I would like to see a modest pullback before I would consider adding them to my portfolio. In the end, I believe V is a better investment but it’s not right for me at its current level.
Who has the most market share?
Service fees for Mastercard are negotiated and calculated as a percentage of global dollar volume. Data processing fees are known as “switching fees,” which are a small, fixed cost per transaction charged to the issuer. These stocks also offer modest dividends to reward patient investors. Choosing between the two may come down to which stock suits investors’ portfolio strategy. Mastercard’s performance and growth trump Visa, while Visa’s stock appears to have the edge in valuation. Because Visa has a larger market share in the U.S., it had stronger revenue growth due to growing spending (which flies in the face of the notion of a recession, but more on that later).
- This validates my views that payment transactions in the US are recovering faster than the rest of the world, and this trend could continue for a while.
- Of the 52 stocks in the Consumer Financial Services industry, V is ranked #9 while MA is ranked #23.
- V is estimated to increased its revenue by a CAGR of 13.5% over the next five years.
- It also has more potential to accelerate its shareholder returns as the cash on its balance sheet has grown to $16.5 billion, 3.5% of its market cap.
Both MA and V stocks are trading above their 5Y forward EBITDA mean. Visa grew its last-twelve-months (LTM) revenue by a 4Y CAGR of 6.3% through FQ3’21. In contrast, MA grew its revenue by a CAGR of 9.9% over the same period. Hence, we believe a high vaccination rate is the game-changer for international travel. More and more countries will begin to embrace COVID-19 as endemic.
Visa is one of the most profitable businesses in the world
The Motley Fool owns shares of and recommends Mastercard and Visa. But the bottom line is, I think the bigger opportunity of these two for Mastercard is this is the company that pivoted more toward particularly the business-to-business payments sooner. It’s certainly invested more in building out that part of its business. But it has some advantages and the fact that it moves faster there.
For investors seeking broad-based exposure to the financial services space, buying both Mastercard and Visa stocks could be the right move. Both companies have historically proven to be relatively recession resistant, and both are positioned to benefit from the long-term growth of the global economy. Each company should also continue swing trade indicators to benefit as cash continues to account for a decreasing portion of spending and commerce continues to migrate to digital channels. I expect Visa’s upcoming quarterly earnings results to be strong, where I think revenue growth will likely in the high single digits, with earnings growth likely in the low double digits.
Visa, Mastercard, American Express, and Discover are responsible for handling the majority of the world’s card payments. Visa and Mastercard present distinct offerings, as neither company is involved with extending credit or issuing cards. This means that all Visa and Mastercard payment cards are issued through some type of co-branded relationship. While the two companies don’t extend credit or issue cards, they do partner to offer the broadest array of products encompassing credit, debit, and prepaid card options. While Mastercard shares have enjoyed better price performance, Visa stock appears to offer a slightly better discount.
However, both stocks are trading at the lower end of their usual range, making them seem like bargains. The two questions I wanted to answer from my analysis were which company had the better financial metrics and would I invest in either company at today’s valuations. Based on my research and analysis I believe V has stronger financial metrics than MA.
Mastercard enjoys a subtle but meaningful edge
This validates my views that payment transactions in the US are recovering faster than the rest of the world, and this trend could continue for a while. Visa generated $21.8 billion in net revenue for 2020, and this number went to $24.1 billion in 2021; An increase of 10%. On the other hand, Mastercard generated total net revenue of $11.2 billion for 9 months ending September 2020 and $13.7 billion for the same period in 2021, with revenue growth of 22%. Despite higher revenue, the high number of Visa’s shares translates this into a revenue per share of $10.74 (YoY Growth of 30.30%), while Mastercard has a revenue per share of $17.87 (YoY Growth of 31.88%).
While these three companies are all extremely similar at their base, they also have major differences. I want to begin by pointing out that Visa and Mastercard are more similar to each other than to American Express. Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion. Don’t panic if you already own a stake in Visa and aren’t in a position to swap it out for the other name.
The first area I look at is cash from operations as this indicates the amount of money a company brings in from its ongoing operations. V generated $10.44 billion in cash from operations in 2020 which was an increase of $3.86 billion (69.18%) over the past 5-years and $1.12 billion (12.05%) over the past 3-years. V has had a 14.23% average annual growth rate over the past 5-years and 6.45% over the past 3-years. MA generated $7.22 billion in cash from operations in 2020 which was a $3.12 billion (67.35%) increase over the past 5-years and $1.56 billion (27.54%) over the past 3-years.
Another key difference between Mastercard and Visa lies with their relative focus on the B2C/B2B markets. Moving on, I will be going into detail about Visa, Inc in three key areas where the company is differentiated from its key competitor and peer, Mastercard Incorporated. Among their new and innovative schemes, https://bigbostrade.com/ MA introduced their Mastercard Installments “Buy Now, Pay Later” (BNPL) program in September 2021, which delivers a choice to consumers at checkout. Further, in the spring of 2022, Mastercard plans to open a “Sustainability Innovation Lab” in Stockholm for the creation of climate-conscious products.
In this section of the article, I will review Mastercard’s recent 4Q 2020 results and continue to touch on the areas where Mastercard Incorporated operates differently from its peer Visa, Inc. Visa, Inc’s total cross-border volume and cross-border volume excluding transaction conducted within Europe fell by -33% YoY and -21% YoY, respectively in 1Q FY 2021. As American Express operates more like a bank than a fintech company, it is a bit more complex to understand. However, the stock is cheaper, and there is more of a valuation cushion here.
The book value growth has been slow, largely due to the large quantities of share buybacks being completed by the company over the past 5 years. The use of credit cards and other online payment methods has increased significantly over the past year, as people have relied more on digital modes of payments consistent with remote lifestyles. Despite increasing prices, retailers have reported solid sales because spending on services and discretionary items has increased significantly.
Further, its P/S multiple of 15.2 times compares to its mean multiple of 18 times over the same timeframe. Additionally, Mastercard enjoys an operating margin of 56.8% and a net income margin of 44.7% for the last 12 months, while its free cash flow margin is an attractive 48.4%. While both companies exhibit attractive fundamentals and have been untouched by the banking crisis, Visa appears to look slightly better in the near term. For example, Visa enjoys a higher operating margin of 67% and a higher net income margin of 50.3% for the last 12 months. The company also has a higher free cash flow margin of 58.8% for the last 12 months. Visa is trading at a trailing P/E of about 31.8 times, versus Mastercard’s current P/E of around 34.3.
On a QoQ basis, Mastercard’s top line increased by +7% to $4,120 million in the most recent quarter, and this was better than sell-side analysts’ 4Q 2020 revenue forecast of $4,010 million. Thirdly, Visa has a relatively stronger emphasis on the B2C (Business To Consumer) payments market, while Mastercard is more focused on opportunities in the B2B (Business To Business) payments market. In terms of profitability, Visa’s operating and net margins for the quarter that ended in September 2021 were 65.80% and 54.64%, while Mastercard’s margins for the same quarter were 55.43% and 48.53%, respectively. When it comes to balance sheet strength, both Visa and Mastercard have net cash balances compared to American Express complex balance sheet of assets and liabilities. This nuanced dynamic is one that will likely persist for several years, providing Mastercard a slight but decided edge on its bigger rival as long as it does.
Commerce Department, retail sales rose a seasonally adjusted 1.7% in October. Furthermore, technological innovation and the rapid adoption of digital prepaid card services should enhance the credit card market in the coming months. According to Research and Markets, the global credit card market is expected to grow at a 3% CAGR to hit $103.06 billion in 2021.