- I analyzed the information provided in Mastercard and Visa's quarterly reports and put them into pictures.
- Visa is clearly larger, but Mastercard has meaningfully higher growth in most products and regions and is growing revenue/GDV faster than Visa; however, Visa has higher margins.
- The two most important KPIs--GDV/share and transactions/share, have grown significantly for both companies, though I note that the former has grown faster, likely due to more small transactions.
- While Visa has higher margins in part due to its scale, MA has demonstrated higher growth, which is reflected in its higher valuation--a topic I may cover in a future.
Mastercard (MA) and Visa (V) both provide a large amount of quarterly information on the gross dollar volume ("GDV") and the number of transactions categorized by region, type of transaction (purchase vs cash), and product line (credit/debt).
I analyzed the numbers visually and arrived at the following observations for the December 2016 - March 2020 period:
V’s total GDV is almost twice that of MA’s, but MA has grown by twice as much since December 2016 (in comparison, PYPL has grown 3 times that of MA) (figures 1A, 1B below)
Visa and Mastercard both have most cards in the Asia Pacific region (figure 6A-ii, 6B); Visa’s second-largest market by cards is the US, while MA’s secondary largest market by cards is Europe; MA has the highest GDV growth rate in Europe and Asia, while V appears to have focused its growth in the US, which is the largest market in the world. In Latam, MA is gaining but V is losing GDV (figures 2A, 2B)
V has 30% more GDV in debit than credit; MA’s debit and credit GDV has been somewhat similar, but the debit growth rate is far higher, particularly in international markets (figures 3A, 3A-i, 3A-ii)
MA and V have both grown GDV by similar amounts. As MA is smaller, it has grabbed a disproportionate amount compared to V (figure 7).
For both companies, Revenue per GDV and Revenue per Transaction have both grown, indicating that there is some pricing power. However, Revenue per Transaction has grown slower, suggesting that GDV per transaction has decreased, i.e., the reach of both companies have extended into smaller transactions (figures 8A,8B)
Operating and Net income margins at both companies have expanded over the period, confirming the powerful operating leverage (figures 8A-i, 8B-i).
From a shareholders perspective, MA’s GDV per share has grown 60% since December 2016, i.e., each share now “owns” 60% more GDV today. Similarly, V’s GDV has grown by over 70%, but that is distorted by the one-time increase due to its acquisition of Visa Europe (figures 9A, 9B)
- Operating metrics: the number of transactions processed has grown faster than GDV as cheaper and more ubiquitous technology has enabled it to process more smaller transactions (figure 10A).
- Financial metrics: MA's per share financial metrics (i.e., rev/share, ebitda/share, net income/share, and free cash flow/share) have outgrown operating metrics, indicating that pricing power and operating leverage continue to be present.
- Share price and valuation: MA's share price has outpaced its per share financial metrics (up 3x vs 2.7x) (figure 10B). While its free cash flow yield and earnings yield (1/PE) have rebounded to a little over 3% (as of 3/31/2020), they are still below the 2Q2016 levels. The lower "cap rate" suggests that the market perceives a decreased risk at MA as it has become "too important to fail". As of today, MA's free cash flow yield and earnings yield are both approximately 2.5%.
- Operating metrics: like MA, the number of transactions processed has grown faster than GDV (figure 11A).
- Financial metrics: Revenue/share and ebitda/share growth have outpaced operating metrics, indicating pricing power. More significantly, net income/share, and free cash flow/share have outpaced operating metrics.
- Share price and valuation: V's share price has kept up with its per share net income and free cash flow. While its free cash flow yield and earnings yield (1/PE) have rebounded to around 2.8% as of 3/31/2020 from the 2Q2019 lows, both are above the early 2017 levels (figure 11B), suggesting that the market has priced in V's moderating growth rate. As of today, V's free cash flow yield and earnings yield are approximately 2.7% and 2.5% respectively.
- I believe Mastercard to be the better buy:
- Even though Mastercard's growth is higher compared to Visa, both trade at valuations that are in the same vicinity.
- Given the oligopolistic industry structure and the fact that MA is a very large company valued at over $300 billion dollar in market cap that processes north of $6 trillion in GDV annually, I do not see Mastercard's relatively smaller size as a higher risk.
- As such, I believe MA is the better buy of the two. I would add to my position but for the fact that my portfolio is already way overweight Mastercard and payment processing.
(1A) Indexed GDV growth: MA’s growth has outpaced V’s over the last 3 years, but PYPL’s growth has been 2.5x higher than MA
(1B) Actual GDV: V’s GDV is almost 2x that of MA (PYPL is significantly smaller than M or V)
(2) For MA and V, which regions are driving GDV growth?
(2A) MA growth is driven by Europe (which is large); all its regions outgrew V
(2B) V GDV growth is driven by the US (largest) and CEMEA (small); Latam shrunk, and all its regions grew less than MA’s weighted average growth rate. Europe and APMEA have not delivered strong growth
(3) Growth: driven by credit or debit?
(3A) MA growth driven by debit; V credit grew a little faster than its debit but pulled back more through COVID-19.
(4A) Growth driven by purchases or cash transactions?
(4A) MA cash and purchases strong; Visa’s purchases growing but cash volume declining
(5) Purchase Transaction count:
(5A) Total transactions have grown for PYPL, MA, and V
(6) Outlook: account growth may be a good leading indicator of near-term growth
(6A) Far stronger growth in international cards at MA; Visa’s growth is weaker than MA’s—its primary growth drivers are Asia Pacific and the US
(7) How is new GDV split between MA and V?
New transactions over the last 3.5 years are roughly evenly split between the two competitors.
(8) Revenue per GDV and revenue per transaction, and margins
(8A) MA (I used to TTM revenue to current quarter run rate GMV and TTM revenue to # of transactions)
(8B) V (I used to TTM revenue to current quarter run rate GMV and TTM revenue to # of transactions)
(9) GDV per share, and transactions per share:
(10) MA: Comparison of growth in operating metrics, per share financial metrics, and share price:
(11) Visa: Comparison of growth in operating metrics, per share financial metrics, and share price:
Analyst's Disclosure: I am/we are long MA, V, PYPL.
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