Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are the biggest players in payment processing. These two giants hold a virtual oligopoly, accounting for 69.5 percent of card transactions around the world.
They’re both experiencing historic high market capitalizations after recovering from the coronavirus pandemic.
With both investments looking similarly stable through next year’s recession, many investors are wondering whether to invest in Visa vs Mastercard stock. So, which is better?
The two companies’ fates seem intrinsically linked, not least because they have similar competitors and regulatory challenges. And unlike competitors American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS), neither company underwrites debt. Instead, they simply provide the payment network for banks and retailers, generating revenue off each transaction.
When the coronavirus pandemic led to global lockdowns, the push to ecommerce kept them in business, despite the losses taken from travel grinding to a halt.
To figure out which stock is best, we examine key differences of each company to determine how they’ll each fare in the coming year. We begin with Visa.
Visa Stock Benefits From Cash > Digital Payments
Of the two companies, Visa is the larger one. It’s expected to process between $15 trillion and $20 trillion worth of transactions in 2020. This is on the back of consumer spending habits changing due to the coronavirus.
As cities issued social distancing guidelines, people shifted away from cash and check payments in favor of contactless chip card payments.
This helped the company avoid some of the effects of the coronavirus market crash that affected the wider market.
The company’s most recent financial repot shows it earned $4.84 billion for the second quarter. This puts in on track to generate $18 billion to $20 billion in revenue for the year.
With a 64.87% pretax margin, that puts the company in a great position, despite cross-border spending dropping by 37 percent from the prior year.
The company made $1.07 per share for the second fiscal quarter of 2020. Because of this, Visa upped its dividend for 2020 from $0.25 to $0.30 per quarter. That’s a 0.6 percent dividend yield of $1.20 per year.
Visa’s stock price hovered around $200 for much of the year, putting it at an approximately $420 billion market cap. it’s making moves to continue growing its revenue streams in alternative payments.
This includes an investment in U.K.-based payment processor Global Processing Services (GPS) and a $5.3 billion acquisition of Plaid, which connects banks to fintech apps like Acorns and Venmo.
These moves will help the company fight of startup competitors and maintain its market share in the coming year.
Mastercard Has Been On An Acquisition Spree
Mastercard is in second place to Visa, but it’s still a market leader. It’s also not standing by to let Visa take all its shine; it spent $3.19 billion to acquire Nets Holding A/S, a Danish payments company.
It followed that up by purchasing Wameja Limited, an Australian payment services company, for $126.1 million. This helped the company collect $3.26 billion in revenue for the fiscal quarter ending June 30 off its 2.2 billion payment cards. This was a 20% drop from the same quarter in 2019.
Like Visa, Mastercard benefited greatly from the push to contactless payments and ecommerce. Even though travel spending declined with travel restrictions, it gained big on spending for services.
After the initial panic shopping at the start of the pandemic. People switched to services like cybersecurity, streaming services, and cloud computing. These services made it easier to work and go to school from home, proving these payment services can easily pivot with the changing economy.
This propelled Mastercard into the $330-$350 trading range with a market cap of $330 billion. It also pays an annual dividend yield of 0.47% with $1.60, or $0.40 per quarter.
While the yield itself is $0.40 per year higher than Visa’s, it’s a smaller percentage of its earnings. Let’s dive into the risks of investing in each stock.
Is Visa Stock A Safe Bet?
The danger of being the industry leader is that everybody’s trying to dethrone you. Visa is facing stiff competition from Mastercard, but they’re both facing competition from fintech and cryptocurrency upstarts looking to take over market share.
On top of this, regulators around the world are starting to turn sour on their dependence on American financial infrastructure.
The European Commission, for example, is working on ways to promote regional competition over these companies within their borders.
Steps like this are going to dampen Visa’s growth potential, which is something investors don’t take lightly. A larger size also means more operational expenses, but the company has higher margins, so it won’t have issues drawing revenue, even if regulations don’t go its way.
It’s also investing in competition in the Europe, Asia, and Australia to remain competitive. This makes the long-term benefit worth the short-term risks for some investors.
Dangers of Buying Mastercard
Mastercard faces many of the same problems as Visa, which includes growing pressure from competition and regulators. The digital payments space is getting more competitive, and there’s no guarantee a fintech startup won’t find a way to take some of their market share. This risk gets even greater as the economy heads towards recession.
Consumer spending already dropped, and the absence of major events and tourism is fueling much of the declines both companies experienced.
The biggest worry with Mastercard is you’re paying over $100 more for one share that has a smaller potential return, as both stocks seem to perform relatively similarly.
Mastercard Vs Visa Stock: The Bottom Line
Visa and Mastercard have a virtual oligopoly on the payments processing market, but that’s going to be harder to hold onto as time goes on.
New players are constantly entering the space, and government commissions in places like Europe are helping them overcome the high barrier to entry into the market. Not only that, but contactless and mobile payments are now involving crypto projects, some of which aim to replace these legacy systems.
The biggest thing going for both is that they have existing infrastructure and partnerships that will be hard to take over. While they may not always hold the same market share, there’s a good chance both companies will remain competitive throughout our lifetimes.
Between the two of them, Visa has a cheaper share price that provides higher dividend yields. Its only downside is smaller growth potential in the event Mastercard manages to chip away at its market. Otherwise, Visa seems to be the more economical choice.
A discounted cash flow forecast shows both fairly valued but MA share price has slightly more downside risk of 5% to $313 from current levels versus 2% for V share price down to $192 per share.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.