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Thesis
Visa Inc. (NYSE:V) and Mastercard Inc. (NYSE:MA) are huge players in the credit services market with footprints all around the globe. Both companies have secured a strong footing globally, where they process trillions of dollars in total payment volumes per year. Visa is the bigger of the two entities with higher revenues, higher profitability, and higher valuation, but Mastercard is quickly making its way to catch up with the front runner. The future growth prospects of companies are more important from an investors' point of view. Even though both companies appear to have positive future outcomes, Mastercard seems to have higher growth prospects and opportunities.
I would give Mastercard a slight edge over Visa because of its faster growth metrics, its B2B initiatives, and the opportunity pertaining to Amazon.
Overview
Visa and Mastercard are both tech companies that connect consumers and merchants for digital transactions and have been seen as rivals in the e-payments sector for over a decade. Mastercard had its IPO in 2006 with a share price of $39 and a market cap of $3.7 billion, while Visa had its IPO in 2008 with a share price of $44 and a market cap of $17.9 billion. They stand at share prices of $322 and $196, with market caps of $316.5 billion and $414 billion, respectively. Those are growth rates of over 8x and 4x in share price and over 85x and 23x in market cap within a margin of 15 years.
Both companies have a very similar business model where rather than issuing cards directly, they partner up with institutions such as banks to have their cards issued. V and MA both hold a spot in the top 20 of the S&P 500 index list, but historical figures are only a measure of past performance; To expand on their future stock value, let's dive into the prospects of each entity.
Financial Performance And Growth
While this article focuses on the future of both companies, I feel the need to give a brief overview of their financial performance and how it relates to their valuation to understand better the information presented later in the article.
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%).
Similarly, the diluted EPS for the trailing twelve months (TTM) ended in Sep. 2021 for Visa and Mastercard was $5.63 and $8.13, and $1.64 and $2.44 for the three months ending Sep. 30, 2021, respectively.
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.
Judging by these metrics alone, although Visa is currently more profitable than Mastercard, the earnings growth of Mastercard should be considered when making an investment decision. Mastercard is the smaller of the two entities and has a lot more room to grow in the industry, which it certainly seems to be doing.
Innovation
Among their new and innovative schemes, 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. Finextra reported that "the lab will explore how Mastercard can apply technologies such as 5G, quantum and advanced AI to address environmental challenges. It will consist of an R&D Center focused on technology for sustainable consumption and value chains."
According to the Future of ESG tech 2022 report, "The Mastercard Farmer Network, part of the company's broader 'Lab for Financial Inclusion' commitment to connecting one billion people to the digital economy by 2025, is a platform that digitizes marketplaces, payments workflows and farmer financial histories within the agriculture sector. As it is being rolled out in East Africa and India, the platform is designed to support the smallholder farmers that are critical to developing economies across the globe."
However, Visa is also not far behind in such endeavors. 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. According to Finextra, the Visa Eco Benefits bundle "includes a carbon footprint calculator from the fintech company Ecolytiq, the ability to let cardholders offset their carbon, educational tools, sustainable card materials, donations to environmental groups, and cardholder rewards for sustainable behavior."
It's extremely hard to judge a company's prospects based solely on its plans that rest on its current innovative announcements. Still, I would have to give Visa an edge on this criterion due to their Visa Eco Benefits program. However, Mastercard may yet come up with something to overtake Visa as its track record is exemplary, especially as MA is more invested in the business-to-business section of the industry, which seems to have a lot more opportunities coming up in the future.
The Amazon Conundrum
There is no denying that Amazon (AMZN) is a retail giant with footprints all across the globe, and credit card companies partnering up with it enjoy heavy transactional benefits. However, most recently, Amazon has clearly stated their issues with Visa concerning high transaction fees in a public statement, "The cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers. These costs should be going down over time with technological advancements, but instead, they continue to stay high or even rise. As a result of Visa's ongoing high cost of payments, we regret that Amazon.co.uk will no longer accept UK-issued Visa credit cards as of Jan. 19, 2022. Customers can continue to use all debit cards (including Visa debit cards) and other non-Visa credit cards to shop on Amazon.co.uk. With the rapidly changing payments landscape around the world, we will continue innovating on behalf of customers to add and promote faster, cheaper, and more inclusive payment options to our stores across the globe."
This gives Mastercard a good opportunity to replace the "Amazon Rewards Visa Card" (Amazon and Visa's co-branded credit card), which, in my opinion, can result in Mastercard securing a very strong holding in a market where Visa outperforms it through the sheer size and network of it. If the issues between Amazon and Visa are resolved, Mastercard faces no downside. However, a possibility that this may play out in favor of Mastercard puts a steep upside into perspective.
Conclusion
Both companies being giants in the credit card industry, offer stable returns in the long run when looking in from an eagle-eye view. Comparatively, innovation and future growth measures will dictate which companies do better, relative to the other.
As of today, both companies exhibit a strong bullish trend to give out positive future returns, but being a smaller company than Visa and outpacing the competitor's growth metrics seems to play in favor of Mastercard.
