Visa Vs Mastercard – Who Could Be The Winner For Investors?

by Trefis Team
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Mastercard (NYSE:MA) and Visa (NYSE:V) are two of the largest electronic payment networks in the world, powering credit and debit card transactions globally. The business has suffered this year as card swipes at physical retail stores plummeted. However, despite a sharp initial decline, both stocks are back where they were at the beginning of this year. So what comes next? If you were to bet on one of them, which one would you choose to park your money? Our assessment is that even though Mastercard is trading at a higher multiple, it may still turn out to be a better choice for investors. Our dashboard VISA vs Mastercard: Investors’ Choice gives further insights into historical performance of these two companies, and arguments around why Mastercard may currently be a better investment.

Visa

When we look at any investment opportunity – return is a key consideration apart from risk. Return is a function of buy price, sell price, and time duration. Let’s look at the buy price first. Currently, Mastercard is trading at a P/E of 39 and Visa is trading at a P/E of 35, which implies that you’ll pay $39 for each dollar of Mastercard earnings vs $35 for each dollar of Visa’s earnings. Mastercard is roughly an 11% more expensive investment than Visa, but is that extra money worth it? For this, we need to dig in deeper and look at profitability and growth.

Mastercard’s net margin for the last 3 years averaged 39% vs 46% for Visa. So far, Visa looks better given that you’ll pay less money for better margins. But that’s not all. Net margins can fluctuate because of non-operational reasons. So why not look at operating margins? The story is the same here – 53% for Mastercard vs 62% for Visa over the last 3 years (average). So are you really getting a better deal with Visa? Not so fast. We haven’t even considered growth yet. Mastercard’s average annual revenue growth between 2015 and 2019 was 14.9% vs 13.4% for Visa. Not much difference here, but here is the twist – If we look at just the last 2 years, we find that Mastercard has accelerated its growth to 16.3% while Visa has slowed down to 11.8% . Perhaps this is why the market is pricing Mastercard higher?

So how do we make a decision? Let’s look at how much we could sell these stocks for 3 years down the line. Let’s ignore the Covid-19 impact for the moment, and look at growth and profitability together. Assuming this growth trajectory continues for the next 3 years at current (2019) profitability, Mastercard could be looking at growing its EPS to $12.50. Even if the P/E shrinks from 39 to 30 (the lowest P/E seen in the last 5 years is 27.3), we may be looking at stock returns of nearly 22%-23% in 3 years. On the contrary, the same assumptions with Visa would imply nearly 14% returns. So even though Mastercard appears relatively expensive, it could still edge out Visa as a potential investment. The impact of Covid-19 is likely to be similar on both companies, and unlikely to swing the decision in the favor of one vs the other.

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