You do not need Visa Inc. (V) and Mastercard Incorporated (MA) to further definition. Their omnipresent cards dominate the global card network. According to a Nilson report, V and MA together accounted for 64% of card purchase transactions in 2020. China’s UnionPay also captured 32% of the market share.
Both companies are large scale businesses which are also very profitable. They’ve also been massive long-term winners for impatient investors. Even with the advent of PayPal (PYPL), their business models remain convenient and unbroken. Moreover, many new players in the field of fintech have appeared in the field of payments recently. Despite this, MA and V continue to dominate the payments space, both offline and online.
We’ll discuss whether these two giant payments deserve a space in investors’ ever-growing portfolios. We’ll also share whether investors should choose one or add both now.
V Stock vs. MA stock performance to date
V Stock vs. MA stock performance to date (as of Oct 8 21).
Both stocks started the year in the red. Even the growth-to-value turnover worsened as its momentum regained. Both stocks rode the ride toward quality aggressively, with V stocks leading the way. However, the momentum started waning in July/August as both stocks fell. V stock has currently managed to gain 5.7% year-to-date. In contrast, MA barely broke. Both stocks track the SPDR S&P 500 ETF’s 18.3% YTD gain (SPY) by a wide margin.
Both are driving the recovery process across the border
MA quarterly revenue segments. Data source: company filings
Fifth quarterly revenue segments. Data source: company filings
MA and V clearly demonstrate flexibility in their business models. Both companies have already outpaced their pre-COVID revenue in their most important sectors. It clearly shows the high quality aspect of their revenue streams. Emerging FinTech players have tried to weed out the lucrative revenue streams of MA and V over the years. However, such pioneering payments have successfully developed. Not only did they retain the theme, but they also increased their impact. We are confident that Mastercard and Visa will continue to play their leadership roles going forward. The “common enemy” is criticism. Monetary transactions are still prevalent in developing economies. Therefore, there are plenty of opportunities to take advantage of the MA and V.
Notably, cross-border transactions have yet to recover to their pre-COVID levels. Mastercard’s FQ2’21 cross-border revenue of $1.08 billion is still well below the $1.52 billion of FQ2’19. Additionally, Visa’s international FQ3’21 revenue of $1.7 billion was also significantly lower than the $1.98 billion in FQ3’19.
However, readers can find that the recovery is gaining momentum. The pace is also largely in line with the recovery in travel spending. We also highlighted recovery in our recent article on Airbnb (ABNB) and Expedia (EXPE). Recovery was lagging. However, as more economies begin to “live with COVID,” we’re sure it’s only a matter of time.
Just over the weekend, the International Travel Center of Singapore announced a slew of changes to its post-COVID-19 reopening policies. Singapore has one of the highest rates of full vaccination in the world. Based on OWID data as of October 8, Singapore ranks fifth in the world in this aspect. Therefore, the Singapore government believes that the country is ready to embark on a more aggressive reopening rhythm. Singapore Prime Minister Lee Hsien Loong emphasized: “Singapore cannot remain closed and closed indefinitely. We need to update our mentalities. We must respect [COVID-19]But fear should not paralyze us. Let’s start our daily activities as normally as possible, taking the necessary precautions.”
Thus, we believe that the high vaccination rate is a game-changing factor in international travel. More and more countries will begin to embrace COVID-19 as an endemic disease. It will surely boost the recovery of international travel and spending. Therefore, the leading players in the field of payments with huge cross-border returns such as MA and V are ready to take advantage. We believe the best is yet to come.
Both are still expected to grow rapidly
MA LTM EBITDA & Ordinary Net Income Margin. Data source: S&P Capital IQ
V LTM EBITDA and Ordinary Net Income Margin. Data source: S&P Capital IQ
Clearly, Visa has consistently posted higher EBITDA margins and a normal net income margin. As a market leader, it is expected. Despite this, MasterCard is growing faster than Visa, due to its smaller size.
VISA vs. Compare MA LTM revenue trends. Data source: S&P Capital IQ
Visa revenue in the last twelve months (LTM) grew at a 4-year compound annual growth rate of 6.3% during FQ3’21. In contrast, the moving average grew its revenue at a compound annual growth rate of 9.9% over the same period. Thus, MasterCard was able to grow much faster than V.
VISA vs. Comparing MA LTM EBITDA Trends. Data source: S&P Capital IQ
Likewise, Visa was also the slowest growth player here in terms of EBITDA growth. Visa increased its earnings before interest, tax, depreciation and amortization at a compound annual growth rate of 6.2% over the same period. However, Mastercard increased its earnings before interest, tax, depreciation and amortization at a compound annual growth rate of 9.4% over the same period. The superior growth profile of Mastercard’s business model is clearly demonstrated.
Average estimated earnings and masters mean consensus. Data source: S&P Capital IQ
V and MA estimated EBITDA means consensus. Data source: S&P Capital IQ
It is estimated that V increased its revenue at a compound annual growth rate of 13.5% over the next five years. The compound annual growth rate (CAGR) of MA’s revenue was around 13.5% by fiscal year 25. Therefore, both companies are expected to report higher revenue growth in the future. Notably, Visa is expected to grow faster than its historical averages indicate. Most importantly, both MA and V are expected to report faster EBITDA growth. However, the EBITDA of 13.9% by FY26 is expected to outperform moving averages. Meanwhile, the MA is expected to register an EBITDA compound annual growth rate of 13.1% over the next five years.
So, is a V or MA stock a buy now?
EV/Fwd EBITDA Stock Trend.
Stock trend MA – EV / Fwd EBITDA.
Both MA and V stocks are trading above the 5-year average EBITDA. V is currently trading at an EV/Fwd EBITDA of 29.6x. It trades 33% above its 5-year average EBITDA. On the other hand, the moving average is trading at an EV/Fwd EBITDA of 32.8 times. This is more expensive than the V assessment. Moreover, it is also 32% higher than its 5-year EBITDA multiplier.
So, the V might sound like a better buy here. It is expected to grow at a faster rate than its historical estimates. It is also more profitable. In addition, it is also priced at a lower premium rate. However, investors should note that both players are currently trading at a significant premium above the five-year historical average. We believe the market appears to have priced in its faster expected growth rates. Hence, we’re not entirely sure if both players will help investors outperform the market going forward.
Therefore, we do not take any of this price. We will revisit it again if there is a deeper bounce. we Rate both in neutral So far.