Why do Financial Pros Favor Visa Over Mastercard?

Visa (V) and Mastercard (MA) are two peas in a transaction processing pod.

Both rack up fees every time you swipe your card. Neither holds consumer debt.

Yet, financial pros seek out Visa’s stock almost 3x more than Mastercard’s.

Why is that?

Mastercard has better revenue growth…but maybe there’s something more…

Visa’s Business

As the world’s financial superhighway for digital payments, Visa doesn’t just link consumers, businesses, and governments—it makes their financial lives run smoother, faster, and smarter. 

And it’s the complete package: an unparalleled assortment of payment solutions, high-end security features, and a global reach that makes even the internet jealous.

Visa’s VisaNet network is a juggernaut where fraud protection for consumers meets guaranteed payment for merchants. 

Unlike card-issuing institutions, Visa doesn’t profit from interest charges. They’re the middleman that everyone actually likes, raking in fees for simply making our transactional lives less of a headache.

Visa Segments its Business into the Following Areas:

• Service Revenue (30% of total revenues): This is where financial institutions fork over fees for the privilege of issuing Visa-branded cards or running transactions through VisaNet.
• Data Processing Revenue (40% of total revenues): A lucrative corner where VisaNet provides services like authorization, clearing, and settlement.
• International Transaction Revenue (20% of total revenues): Earns its keep from fees linked to cross-border transactions. 
• Other Revenue (10% of total revenues): The catch-all category includes fees from licensing the Visa brand, plus revenue from value-added services, nestle here.

With consumer spending at historic highs, Visa has done incredibly well, hitting YoY growth every month for the past year:

Source: Visa Q3 Earnings Presentation

However, as households draw down on their savings, some economists worry consumer spending will contract in the coming months, curtailing Visa’s performance.

Additionally, the company dropped $500 million into escrow to insulate shareholders from pending litigation.

Financials

Source: Stock Analysis

Despite incredible growth the last few years, management forecast full 2023 guidance below analyst expectations, pegging revenues at the low double digits compared to analysts’ estimates of 17%. Earnings forecasts of mid-teens also fell short of analyst estimates of 20%.

Ironically, they attributed this to lower inflation (which pushes up transaction prices), higher operating costs, and increased investment on business transformation initiatives. 

Nonetheless, management committed to their shareholder-friendly practices, maintaining the 0.78% dividend (about $3.6 billion per year) and their whopping $10 billion+ buyback program, pretty easy to cover when you generate almost $20 billion in cash from operations while keeping a steady debt load of $20 billion.

Valuation

Source: Seeking Alpha

Because of the company’s stellar performance and massive buyback initiatives, Visa commands a premium valuation, though not as great as Mastercard’s.

As pure transaction processors, these companies hold no consumer debt, unlike Capital One Financial (COF) or Discover Financial Services (DFS).

Western Union (WU) is a transaction processor but has seen its business erode year after year.

Growth

Source: Seeking Alpha

Much of Visa’s premium valuation can be attributed to its consistent revenue, earnings, and free cash flow growth, similar to Mastercard’s.

While not listed here, DFS and COF saw excellent free cash flow growth over the last few years.

However, their performance is more like a bank, exposing them to interest rate changes and other macroeconomic headwinds.

Profitability

Source: Seeking Alpha

Visa certainly stands out regarding margins and returns on equity, capital, and assets. 

However, Mastercard puts up some pretty fantastic numbers as well. Then again, Mastercard trades at a higher valuation.

Our Opinion 6/10

Mastercard’s got a bit more runway in terms of market share. But in our opinion, that’s not enough to justify its premium valuation.

With consumer spending likely to falter in the coming months, we see some immediate headwinds facing Visa and Mastercard.

This shouldn’t constrain either company long-term. However, we could see shares pulling back by 15%-20% in the interim.

However, we believe Visa is better positioned to weather any recession with stronger branding and a more powerful digital presence.