In this article, we aim to provide the ultimate deep dive into Visa vs Mastercard stock, to assess which of the two payment providers are the better pick for 2024.
There’s plenty to discuss, so let’s get started.
Visa Vs Mastercard Stock: How Each Generate Revenue
For the vast majority of revenues, both Visa (V) and Mastercard (MA) take a small percentage for every payment that passes through their systems. So, when a customer buys a burrito bowl at Chipotle, a portion of that transaction will be sent either to Visa or Mastercard, depending on the card used. For their fee, businesses and customers are assured their funds will be sent securely, quickly, and accurately.
The companies do generate income in other ways. For example, through data processing, business solutions, and international transactions. You can read more here.
Now we have the gist, so let’s start actually comparing Visa vs Mastercard stock.
Visa Vs Mastercard Stock: Market Share
When researching this article, we fell down a deep rabbit hole trying to figure out whether Mastercard or Visa had greater market share of payment processing. The short answer is simple: it’s Visa. For example, in terms of credit cards in circulation, 48% are Visa and 36% Mastercard.
The long answer is far more complex, but in the end doesn’t matter. That sounds a little odd, because a greater portion of market share usually something to smile about. But not always.
The reason we at Footnote are not concerned with market share here is because Mastercard have slowly but surely been eating into Visa’s slice of the pie. And there’s evidence to suggest they will keep on munching.
Visa Vs Mastercard Stock: Financials
Growth
Over the past ten years, Visa have seen average yearly revenues grow by 11%. Their profit growth has been even better, at 14%. This is a dream scenario. Consistent, rising revenue is a hallmark of a company with a competitive edge, showing that V is short not only for Visa, but also value investing.
Miraculously, Mastercard’s revenue growth beats out Visa’s, at 12%. Net earnings also win the ten-year average, at 15.7%. This shows that Mastercard is growing faster than Visa, which is why the focus on current market share is (by itself) unreliable.
Another sign of a company with competitive advantage is a gross profit margin greater than 40%. Visa’s average over 10Y has been 98% and Mastercard’s is at 100%. This shows just how good both these businesses are.
All things considered, Mastercard wins the day, but only by a hair.
Debt
Mastercard’s debt is far higher than Visa’s. For debt/equity ratio, MA is at 280%, versus Visa at 53%.
This is definitely a win for V, but are we actually concern about MA? No. Mastercard have more than enough coverage to meet debt requirements. Plus, profits have been so consistent in recent years, it seems inevitable that Mastercard will reduce its debt, when they feel the time is right. In the meantime, they’ll use those borrowings to expand and improve their business, through the 210 territories in which they operate.
Visa Vs Mastercard Stock: Valuation
When comparing two similar companies to find the best, valuation is always the kicker. Let’s look at our favourite two metrics.
P/E Ratio
At the time of writing, Visa’s P/E Ratio is 31.1x. A little higher than we’d like to see. We think a fair P/E might be closer to 24x. That said, Mastercard makes Visa look quite cheap, at 38.3x. Their fair value estimate is even less than Visa’s, at 23x, hitting the nail in the coffin.
Side note: both Visa and Mastercard’s current P/Es are lower than their 5-year averages. Make of that what you will.
Discounted Free Cash Flow Valuation
For our DCF calculation, we get a fair value estimate for V stock at around $200. The company is currently trading at $248, so we’re looking at a premium of 25%.
We think Mastercard is also overvalued, but only by 15%.
New investors might ask, how can it be that MA comes out more expensive using P/E, but cheaper when using DFC. Well, it all comes back to how quickly companies can grow. Here, because Mastercard is predicted to expand faster than Visa, they look to be better valued.
As every seasoned investor knows a DCF calculation is limited for that very reason, it used predictions about future growth. However, Footnote feel confident that both V and MA can consistently develop their businesses in the coming years, by the margins set in our calculations.
For overall valuation then, we would give Mastercard the edge. But again, there’s nothing in it.
Final Thoughts
Visa and Mastercard are both great companies. They effectively preside over one of the most significant duopolies in the business world today, no matter how much American Express or Discovery might hate to admit it.
These two companies (V and M) represent value investing at its best: consistent, rooted, and growing. We here at Footnote believe each will be a trillion-dollar company in the not-so-distant future. Cash is in decline across the world, while digital payments are on the rise (see figure 1.). The world’s population is also still rising, meaning bigger markets and more customers. Visa and Mastercard and therefore here to stay.
Deciding which is the best is a tough choice. As of right now, Footnote would argue that Mastercard is the better pick of the two. Both have their strengths, but a growing market share and better DCF valuation makes MA the top dog for payment processing.
Then question then becomes, are we adding Mastercard (or Visa) shares to our portfolio? Regretibly, the answer is no. Not yet, because we’re waiting for an even greater discount to hopefully see greater results and/or provide a margin of safety.
In the meantime, both are on the watchlist – and we’ll be sure to let our readers know when we do decide to buy.
Thanks for reading.
If you’re looking for another stellar stock pick, take a look at our Investment Report on Lockheed Martin. It’s one you definitely don’t want to miss.