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Visa And Mastercard Show Line Item Improvements But Shifting Product Mix Is A Problem

Sarajevo, Bosnia and Herzegovina - December 21, 2016: closeup pile of credit cards, Visa and MasterCard, credit, debit and electronic on ceramic surface background
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Mastercard Incorporated (MA) and Visa Inc (V) are pioneers and leaders in the credit card industry worldwide. Both companies have led memorable advertising campaigns for decades, and their stocks have been performing consistently over the years. However, given the current facts, neither company has received a recommendation for inclusion in the investor’s “core” portfolio especially if neither of the shares Previously Actress (“parent” and “dependent” portfolios were discussed in a previous article).

Quick outline of the company

Mastercard was launched as a reaction to what eventually became Visa. Both companies enjoyed decades of private ownership and success prior to listing. While both companies classify themselves as operating in the global payments industry, their modus operandi is slightly different.

A large portion of Mastercard’s revenue comes from fees paid by its customers in a roundabout way. When a customer holding a Mastercard branded card from an “issuing” bank makes a purchase from a merchant, the issuing bank pays the cost of the transaction (minus the “withdrawal fee”) to a “buying” bank that processes and settles the trade. Then the customer is charged the transaction cost, through which the “merchant discount” goes to the “buyer”. MasterCard charges a fee to card-issuing financial institutions based on the total dollar volume of the account holder’s activity. Part of the fee is also the use of its network which processes the transaction within seconds. A small percentage of the fee is a “transaction transfer” fee that is incurred each time the issuer receives approval of an authorization, transaction information is cleared between the two parties’ banks, as well as the actual settlement of funds.

Visa provides services including authorization, clearing and settlement services to financial institutions and merchants. Although it does not charge any portion of interest-branded Visa card payments, it does collect fees based on the transaction volume of the financial institutions that use their network.

Both companies are heavily involved in cross-border transaction processing and currency exchange, and they are both perennial competitors and have been a long-time favorite of investors in the sector.

Recent earnings versus previous years

Mastercard’s third-quarter earnings show that the fourth quarter halted a decline in net income over the past half year. While annual growth won’t be anywhere near what it was in 2019, net income and revenue will close out 2021 higher than it was in the previous year.

The company’s transit efficiency in translating revenue to profit has seen steady improvements over the past few years and has trended near its highest levels in 2019. The efficiency ratio remains fairly flat compared to 2020 and higher than previous years to 2020.

However, operational metrics reveal that year-to-date aggregate dollar volumes and purchase volumes are trending lower compared to the prior year. Programs hit hardest in credit products.

The decrease in the contribution of credit products is not new; Since 2018, the company’s debit cards have assumed a larger share of the total dollar volume. While credit products still contribute the most to total purchase volume, this year’s trend in lower purchase volume indicates that both product lines have been affected.

Meanwhile, Visa’s latest fiscal year earnings show an increase in net income and revenue compared to the previous year, reflecting the company’s growth performance in 2019.

Unlike MasterCard, transit efficiency in translating revenue to profit has been steadily improving over the years while the efficiency ratio has fallen around the 35% range since 2018.

As with Mastercard, Visa credit products have lower growth than debit products in terms of volume and payment volume.

Like Mastercard, the share of discount products in the total contribution to metrics (and thus the bottom line) has been steadily increasing over the years. Visa’s discount share has grown in payment volumes slight bigger over the years.

This is at least partly due to Visa’s early partnerships with else Powerful digital payments companies: The company partnered with PayPal in 2016, which has only deepened over the years and also has a stake in Square, which offers Visa-based cash cards to segment buyers. Visa also has a presence on Square’s advisory board.

Noticeable: PayPal and Square were covered in a previous article.

Final notes and recommendations

In terms of landscape, there are two main factors influencing the payments space in the US:

  1. There is a massive glut of digital financial services companies battling for market share across the “standard” buyer and seller segments as well as the crypto wallet space.
  2. Increasing inflationary pressures tend to drag consumption, which in turn threatens the volume of financial services transactions.

Echoes of the second factor in auto retail trends can be found in the context of Rivian analysis as well as analysis of the streaming market in light of analyst expectations that are lacking in Roku.

An additional factor that has led to the two companies’ underperformance over the past year is that very limited cross-border travel and business have had a detrimental effect on cross-border transactions. Given their near-universal global reach, both companies felt strongly about it.

Both stocks started the year underperforming which got some relief around the time the earnings announcement was made around the first quarter. Since then, both companies have largely tuned in with the Nasdaq-100 (NDX) and S&P 500 standards. (SPX). However, around the time the second-quarter earnings announcement, both stocks underperformed after inflationary pressures confirmed themselves as a trend likely to be here for some time.

It should be noted, however, that neither company has stopped exploring avenues for growth; After all, they have six decades of experience with market cycles, innovations, and disruptions. Mastercard recently acquired open banking technology startup Aiia to expand customer access options as well as blockchain security startup CipherTrace to expand further into digital assets. Meanwhile, Visa recently acquired else Open banking technology startup Tink, developer of Currencycloud API, as well as chargeback startup Verifi to enhance the quality of its services with its partners. Oddly enough, Visa also acquired an NFT via an ETH transaction, ostensibly in a move to signal its interest in the world of digital assets.

Both companies have seasoned leadership with strong and acquisitions vision, a very popular and ever-evolving brand, great discipline in terms and a great history of dividend payments to their investors. However, a glut in the digital payments landscape and macroeconomic outlook loom large on the bottom line performance of either company. While basic facts form the “floor” of the stock’s valuation trajectory, expectations about the company’s future form the “ceiling.” For these stocks, the “ceiling” is lowered while the “floor” is still solid.

For the above facts, dear investors Not Holding any stock should take into account the fact that in recent history, under similar economic conditions, valuations tend to be relatively higher in the technology/industry sector. Investors currently Owning any of the stocks has a pitfall to address: they can hold out until prospects improve, dust settles in the battle in the digital payments landscape and a new trend in digital assets is in the interest of companies. Instead, they can switch to other value stocks in the meantime.

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