Is Mastercard a Better Buy Than Visa? The Motley Fool
MA finished 2020 with $6.52 billion in total equity which was an increase of $455 million (7.51%) over the past 5-years and $949 million (17.04%) over the past 3-years. MA hasn’t been a straight line of growth as their total equity has bounced around a bit and dipped in 2016, 2017, and 2018 before it started growing again. On the surface, it seems that Mastercard boasts superior growth prospects compared with Visa. The rapid technological innovations and the recovering economy are driving the growth of the credit services sector.
- This allows me to understand a company’s results not just for the prior year or trailing twelve months (TTM) but over an extended period of time.
- This is likely attributable to the stronger recovery in transaction volume in the US as compared to other parts of the world.
- View all the other top-rated stocks in the Consumer Financial Services industry here.
- V is also more profitable with an EBITDA margin and net income margin of 69.09% and 51.07% compared to MA’s 57.51% and 45.50%, respectively.
V took 3.75 points in round 1, 4.75 points in round 2, 1 point in round 3, and 2.5 points in round 4. Overall Visa came out ahead 12-6 throughout my 18 different categories across the income statement, balance sheet, cash flow statement and dividend metrics. Not many people look at this but I consider it a focal point of the income statement. This ratio allows me to see how much of a company’s revenue reaches the bottom line and is retained as net income.
Visa vs. Mastercard: An Overview
Notwithstanding, MA and V continue to dominate the payments space, both offline and online. In addition, both companies have been innovative with “Buy Now Pay Later” options offered to consumers, and the BNPL blockchain stock trend is still being reviewed but offers a sizeable new market share. Mastercard announced earlier in the year a “Sustainability Innovation Lab” in Stockholm for the creation of climate-conscious products.
Visa (trading symbol V) commands a $497.5 billion market capitalization, while Mastercard (trading symbol MA) follows closely behind at $359.8 billion (market caps as of May 18, 2021). As neither company extends credit or issues cards through a banking division, both have a broad portfolio of co-branded offerings. Hopes of a continued rebound are supported by both stocks’ historical performance. Over the last decade, Mastercard’s total return is +702% to beat Visa’s +527%.
However, Visa outperformed all competitors, including PayPal (PYPL), Mastercard (MA), and American Express (AXP), in other key categories. It ranked first in favorability at 79%, in trust at 65%, and in weekly users at 34%. In my opinion, these survey results underscore Visa’s robust brand and reputation. The company not only has a large, committed customer base and attracts skilled talent but also enjoys high levels of trust, which is crucial for a payment processing company. The high rankings in favorability and weekly users also indicate that Visa’s services are not just well-known but actively preferred and used, solidifying its competitive advantage in the financial services sector. American Express is more like a bank because, in addition to operating a payments network, it also lends money to consumers on its credit cards.
Visa’s and Mastercard’s most recent quarterly financial results were above market expectations, and both of them also saw a significant improvement on a QoQ basis. The key differences between Visa and Mastercard lie with their mix of debit/credit card transactions, geographic exposure and relative emphasis on the B2C/B2B markets. That’s not quite the case elsewhere, where Mastercard enjoys a measurably better market share. Only 62% of people in the United Kingdom currently own a credit card, according to data from The World Bank, while in Germany the figure’s less than 57%. V – The use of credit cards and other online payment methods is rising as people rely more on digital modes of payment amid a hybrid lifestyle. So, credit card giants Visa (V) and Mastercard (MA) should benefit.
When considering valuation, I always consider what we are paying for the business (the market capitalization) versus what we are getting (the underlying business fundamentals and future earnings). I believe a reliable way of measuring what you get versus what you pay is by conducting a discounted cashflow analysis of the business, as seen below. So the question of which stock is the better value in the current environment really depends on ones understanding of the financial sector and objectives. American Express is a more complex business, but the stock is cheaper.
Round 1: The Income Statement
Blockbuster still serves as an example of what can happen to big businesses that are not innovative in their respective industry. Blockbuster had opportunities to invest in Netflix, and the rest is history. The same can happen in any industry, and fintech continues to grow with consumers, especially with the emergence of cryptocurrency. Another example is that Visa is clearly interested in deals in the B2C space. Visa announced its 1Q FY 2021 (YE September 30) financial results on January 28, 2021.
This creates a high barrier to entry for potential competitors, as replicating such a network would require significant resources, time, and specialized knowledge. Additionally, the trust Visa has garnered from its stakeholders further cements its competitive position. Trust is a crucial element in the financial services industry and is not easily duplicated. Visa (V) and Mastercard (MA) both land a Zacks Rank #3 (Hold) at the moment. It may be worth holding on to shares as both stocks trade attractively relative to their past. Top and Bottom line growth are poised to continue at both financial services firms despite earnings estimate revisions slightly down from last quarter.
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Below you can find some additional data in regards to the companies’ Dividends. In terms of Profitability, it can be highlighted that Visa has a higher EBIT Margin [TTM] than its competitor. Visa has an EBIT Margin [TTM] of 67.14% while Mastercard’s is 56.77%. Below you can find the Internal Rate of Return calculated with my DCF Model where I have assumed different purchase prices for the Visa stock. The pace is also largely in line with the recovery in travel spending. We also highlighted the recovery in our recent Airbnb (ABNB) and Expedia (EXPE) article.
- Blockchain technology and cryptocurrencies like Bitcoin also present potential challenges to Visa’s business model.
- The return on asset ratio is calculated by dividing the net earnings by total assets.
- Visa grew its last-twelve-months (LTM) revenue by a 4Y CAGR of 6.3% through FQ3’21.
- Having a larger debit program is a positive in the current environment, and such trends could last beyond the pandemic.
- Moreover, my DCF Model indicates a compound annual rate of return of 12% for Mastercard while it shows one of 10% for Visa.
- During each company’s last earnings period, both posted strong results.
This may not hold up in an economic downturn, although over the next 20 years or so, this is unlikely to be an issue. Another thing to note is the dividend yield on American Express shares. The stock currently supports a yield of 1.6%, compared to 0.9% for Visa and 0.7% for Mastercard. But the question for investors is, is any one of these payments processing stocks offering better value than the others, or are they all the same?
Round 3: Cash Flow Statement
MA has had an average annual growth rate of 12.97% over the past 5-years and 9.88% over the past 3-years. In this category, V is the clear winner as they have almost double https://bigbostrade.com/ the total cash and short-term investments on the books. V has also done a better job at growing their war chest in overall growth and on their average annual growth rates.
Better Buy: Mastercard vs. Visa
Year-to-date, V has gained 1.59%, versus a -1.30% rise in the benchmark S&P 500 index during the same period. Of the 52 stocks in the Consumer Financial Services industry, V is ranked #9 while MA is ranked #23. In terms of forward non-GAAP P/E, MA is currently trading at 45.29x, 44.9% higher than V’s 31.26x. Moreover, MA’s forward EV/EBITDA of 34.03x is 42.7% higher than V’s 23.85x. MA has gained 16.5% over the past month, while V has returned 13.3%. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
Credit cards often dominate the headlines, with nearly $1 trillion in outstanding revolving credit balances as of the end of the first quarter of 2021. Prior to examining metrics, net income is the last category I look at on the income statement. Net income represents the pure profit a company generates as every last expense is deducted from its revenue. V generated $10.87 billion in net income for 2020 which was a $4.54 billion (71.71%) increase over the past 5-years and $3.38 billion (19.06%) over the past 3-years. V has a 5-year average annual growth rate of 13.50% and 20.33% over the past 3 years.
V and MA are very similar in this aspect but I am going to give the edge to V for having 2 additional years of dividend growth and award the full point to V. On the levered free cash flow I am awarding the point to V as they are generating more than $2 billion more than MA and as of the past 3 years are growing this line item at a quicker rate. I am going to award the point to V on this line item for several reasons. Over the past 5 years, V has grown its total assets by $41.55 billion which is more than what MA has on the books. Likewise, Visa was also the slower growth player here in terms of EBITDA growth. However, Mastercard grew its EBITDA by a CAGR of 9.4% over the same period.
Network
This high ROIC suggests that Visa is highly effective in allocating the remaining cash that is reinvested into the business, generating strong returns as a result. It’s worth noting that Visa’s Earnings Per Share has grown at over 15% annually for the last nine years. In my opinion, this impressive financial performance is largely attributable to the sustainable competitive advantage that Visa’s network and technology provide. In other words, the United States isn’t exactly a high-growth market for credit card middlemen. The two companies — as well as their respective stocks — also sport comparable results for the past several years.
2022-05-10
