Visa Vs Mastercard: Who Wins?

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About: Mastercard Incorporated (MA), V, Includes: AAPL, GOOG, GOOGL, GS, LYFT, MSFT, PYPL, SQ
by: Crispus Nyaga
Summary

Visa and Mastercard have one of the biggest moats in the world.

The two companies are the biggest financial technologies in the world with a combined market cap of almost $600 billion.

I compare their performance and explain why I love Mastercard more.

Visa (V) and Mastercard (MA) are the biggest financial technology companies in the world, with a combined market capitalization of more than $589 billion. The companies are known to be exceptional defensive stocks, which tend to do well even in tough market conditions. In the past one year, the two companies have outperformed the S&P 500 index as shown on the chart below. The same trend of overperformance can be seen in virtually all periods you look.

Source: YCharts

As with my last week’s comparison of Microsoft (MSFT) and Google (GOOG) (GOOGL), this article will compare these two giants in the payment world. The article will conclude on the one I would recommend as an investment.

The Business Model

Visa and Mastercard operate with a very easy and similar business model. They use a four-party system to make financial transactions easy. This system includes the issuers like banks who issue products, the account holders who get the card from the issuers, the acquirers who contract with merchants to accept payments, and the merchants such as retailers and billers. Because of their business model, the companies do not issue the cards, and set the fees of the account holders. Also, they don’t earn revenues from the interest paid by the account holders. Instead, they generate revenue from the payments done using their cards.

This business model allows the companies to operate at high margins. It also makes it difficult for small startups to disrupt the industry. In fact, companies like JCB that have tried to disrupt the industry have found it difficult to find mass appeal. This is shown in the chart below.

Source: Visa

Financial Performance

In the past few years, the two companies have managed to grow their revenues. The reason for this is simple. The world’s population has increased from 6+ billion in 2000 to the current 7.3+ billion people. This growth in population coupled with the overall improvement in the world economy has led to more digital transactions. In my many travels in the emerging and frontier markets, I have observed that many many people are today using their Visa and Mastercard cards to pay in the supermarkets and gas stations. This trend is expected to continue.

As a result, the two companies have seen their revenue continue to grow. For Mastercard, revenue has grown from $5 billion in 2009 to more than $18 billion in 2018. The company is expected to have annual revenues of more than $18.4 billion in 2020 and $21.5 billion in 2021. At the same time, the net income has grown from $1.4 billion in 2009 to almost $6 billion in 2018. The chart below shows the financial performance of MA in the past ten years.

Like Mastercard, Visa too has continued to see its revenue grow. The total revenue has grown from $$6.9 billion in 2009 to more than $25 billion. The net income has grown from $2.3 billion to more than $10.3 billion. The chart below shows the financial performance of V in the same period.

As shown in the two charts, Visa has been a better performer in terms of revenue growth, free cash flow, and EPS.

Part of the reason why the two companies are able to generate high cash flows and profits is that they are high-margin businesses. Their margins are high because most of their staff are focused on developing the technology. As such, they don’t spend a lot of money on sales and marketing, which is common with other businesses. The EBITDA and operating margins of the two companies are shown below.

Based on the revenue growth and other financial metrics, Visa has outperformed Mastercard by a slight margin. In the near future, while I expect the growth of the two companies to grow, I believe the growth will plateau. This is because most of the world’s middle class already have and use the Visa and Mastercard cards. Also, the two companies are already found in most geographical locations, which means that the room for growth will be small. I also believe that new startups like Cash App (SQ) and WeChat will take some market share from the two companies. I don’t expect this market share to have any meaningful impact on Visa and Mastercard’s business.

Financial Position

As a long-term investor, it is always important to look at the financial position of a company. Ideally, you don’t want to invest in highly indebted companies that could fail to honor their financial obligations.

In the past ten years, Visa has grown its debt load from $44 million to more than $16 billion. Part of the reason for this growth in debt was the 2015 acquisition of Visa Europe. The acquisition was valued at more than $23.4 billion and was the biggest acquisition in the company’s history. While I am often critical of such large-scale transactions, I believe that this acquisition was a good one because of the role Europe plays in the global financial economy. The company has cash and short-term investments of more than $11.5 billion.

Mastercard on the other hand has grown its debt load from $22 million to more than $5.8 billion. The company has used the debt to fund acquisitions and return money to investors. It now has more than $7.1 billion in cash, which means that its balance sheet is cash positive on a net basis.

Source: YCharts

Shareholder Returns

Investors generate their returns through stock price appreciation and through dividends and buybacks. On the stock price, Mastercard has been a clear winner as shown in the chart below.

YTD

1-Year

3-Years

5-Years

10-Years

Mastercard (MA)

29.8%

27.52%

156%

230%

1.31K%

Visa (V)

20.70%

21.45%

107%

204%

882%

Source: YCharts

On dividends, Visa and Mastercard have a forward dividend yield of 0.62% and 0.54% respectively. Because of their huge margins and free cash flows, the companies will continue to return funds to shareholders for years to come. This is because their payout ratios are just 18%. This is much better than that of companies like Apple and Microsoft (MSFT), which have payout ratio of 24% and 38% respectively. In the past ten years, Mastercard has returned more than $4 billion to shareholders through dividends. It has also returned more than $24 billion to the shareholders through repurchases. This has seen its outstanding shares decline from more than 1.35 billion to the current 1.02 billion.

Visa on the other hand has returned more than $9.36 billion to shareholders through dividends and more than $39 billion through buybacks. Its outstanding shares have declined from 2.4 billion to the current 2.1 billion.

While the yields on the two companies are relatively low, they are stable and will continue for a long time because of their strong margins, FCF, and their strong balance sheets.

Valuation

PE Ratio TTM

PS Ratio TTM

PE Ratio Forward

PS Ratio Forward

EV/EBITDA

Market Cap

Visa

33

16

30

13

24

$352B

Mastercard

41

17

32

13

30

$242B

Source: YCharts

Because of their fundamentals, Visa and Mastercard are known for their pricey valuations. As shown, Visa has a market capitalization of more than $352 billion compared to Mastercard’s $242 billion. On a trailing PE basis, Mastercard is more overvalued than Visa. However, based on the forward PE ratios, the two companies valuations are just similar. The chart below shows the forward PE ratios of the two companies.

Future Growth

The two companies are also investing for growth. In April, Mastercard announced a partnership with Apple and Goldman Sachs (GS). This partnership will see the company use its tokenization technology to get rid of card numbers. This is a breakthrough technology, which will help prevent fraud and increase safety for the card users. They are also increasing their partnerships with startups in the fintech industry and other industries. This week, Mastercard announced a new partnership with Lyft (LYFT) that will help create a Lyft debit card. In addition to these, the two companies are increasing their investments to promote cross-border transactions. Mastercard has its Mastercard Send while Visa is about to launch its Visa B2B Connect that will use the blockchain technology. These are steps in the right direction and will lead to more volumes and transaction charges.

Verdict and Final Thoughts

Warren Buffett has always talked about the moat and by his definition, I believe that Visa and Mastercard have some of the biggest moat in the world. This is simply because starting a card business is an expensive thing that requires building a lot of trust with banks. This means that it is unlikely that any startup will challenge the two companies. The only company that has succeeded is UnionPay, which is used all over China. The company has succeeded because of the large population and the fact that the financial industry has been closed to foreign companies for years. Beyond China, UnionPay does not have any meaningful market share. Another country that has succeeded to challenge Visa and Mastercard is India, where its Rupay platform has more than 65% of the market share.

As mentioned above, I don’t believe that the new startups trying to disrupt the industry will have any major impact on them. In fact, I believe that most of them will complement the work these companies do. In fact, all the major companies getting into the industry are using the Visa and Mastercard’s technology. This includes companies like Paypal, Cash App, Apple Card, and Venmo among others.

Source: Fortune

In addition to this moat, the two companies have excellent margins, growing FCF, and continue to return money to shareholders. Also, the two are actively investing in other fintech companies with their venture funds.

While I have the two companies in my portfolio, I continue to own more of Mastercard than Visa because of its better balance sheet and its stronger cash position. This means that the company can easily fund growth, increase returns to shareholders, and fund acquisitions.

Disclosure: I am/we are long V, MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.