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SUMMARY
Parkev Tatevosian, CFA, compares Visa and Mastercard, analyzing their revenue growth, profit margins, valuations, and risks. He concludes that while both companies are strong investments, Visa holds a slight edge for new investors at current prices.
MAIN POINTS
- Visa and Mastercard are compared head-to-head, with Mastercard showing stronger three-year revenue growth than Visa.
- Both companies generate substantial revenue from transaction fees and services, benefiting from extensive merchant and consumer networks.
- Visa and Mastercard have improved operating profit margins over the past decade, with Visa currently leading despite a recent one-time legal charge.
- Regulatory risks in Europe and competition from blockchain technologies are identified as significant threats to both companies.
- Discounted cash flow models suggest both stocks are undervalued, with Mastercard trading near its 52-week low and Visa below its calculated fair value.
- While Visa is preferred for new investments, portfolio allocation considerations may lead to increasing holdings in Mastercard.
DETAILED ANALYSIS
Visa and Mastercard stand out as two of the most profitable financial services companies globally, with both benefiting from decades of network expansion among merchants and consumers. Over the past three years, Mastercard has achieved a higher compounded annual revenue growth rate of 13.8% compared to Visa's 11%, demonstrating its robust expansion. Despite this, both firms have consistently delivered double-digit revenue growth alongside exceptional profit margins, largely due to their ability to collect a percentage of each transaction as well as nominal fixed fees, which accumulate to billions of dollars annually.
These companies also generate income from value-added services such as data analysis.
Profitability has been a key differentiator, with Visa's operating profit margin rising from 52% in 2016 to 60% recently, despite a temporary dip caused by a one-time legal expense. Mastercard has also improved its margin, reaching 58%. Looking ahead, Visa's margin is expected to rebound to the mid-60% range, reinforcing its position as the more profitable entity.
Both companies are trading at similar forward price-to-earnings ratios of around 22, which is near their lowest levels since January 2024, reflecting market caution.
The primary risks facing both Visa and Mastercard are regulatory pressures, especially in Europe where efforts are underway to develop alternative payment networks, and the rise of blockchain-based payment systems like stablecoins and cryptocurrencies. These factors contribute to their relatively modest valuations. Discounted cash flow analysis indicates both stocks are undervalued: Mastercard trades at $494, below its intrinsic value of $560, while Visa trades at $325 versus a fair value of $404.
While both are attractive investments, Visa is considered slightly superior for new investors at current prices, though portfolio balancing may justify additional Mastercard purchases.
LINKS
- YouTube channel membership with exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Fiscal.ai investment research platform with a viewer discount.
- Webull investing platform sign-up with bonus shares.
- Substack newsletter subscription for monthly updates.