It is the middle of earnings season and the two largest payment processing companies, Visa (NYSE:V) and Mastercard (NYSE:MA) both posted their quarterly results within recent weeks.
The two stocks are not only the largest payment processors in the world, they are unique in that they form a duopoly in the space. Their networks account for more than 80% of the cards in circulation and about three quarters of the total purchase volume on credit/debit cards.
They also stand out because they are the only two in the space with the same business model. They are simply payment processors, generating fees each time a credit card is used, while the other competitors are also lenders and issuers, with their own closed-loop networks.
While both companies had solid quarters, and beat earnings estimates, investors reacted differently to the two stocks based mainly on their guidance. Let’s take a look at what each expects for 2024 and which might be the better buy.
Mastercard’s partly sunny outlook
Mastercard posted earnings on Jan. 31, and the share price jumped about 3% to $457 per share, primarily on its outlook for 2024. Most of the analysts that cover the stock raised their price targets post-earnings, like Barclays, which boosted it by $49 to $549 per share based on Mastercard’s guidance. That suggests a 20% increase over the next 12 months.
For 2024, Mastercard projects net revenue growth at the high end of low double-digits, which assumes it would be somewhere in the low-teens. For the first quarter, the guidance calls for net revenue growth at the low-end of low double-digits, year-over-year, which would be around 10% or 11%. These numbers were roughly in sync with analysts expectations.
Visa, on the other hand, posted slightly disappointing guidance, and the stock fell about 2% after earnings were released on Jan. 25. For the full fiscal year, Visa estimated high single-digit to low double-digit revenue growth, which is roughly on par with its 2023 net revenue growth. This range puts it slightly below Mastercard’s low-teens revenue growth guidance.
In its fiscal second quarter ending March 31, Visa projects upper-mid to high single-digit revenue growth. That is less than the 11% growth for the same quarter a year ago and short of Mastercard’s low double-digit anticipated revenue growth for the quarter.
Further, Visa foresees low double-digit increases in operating expenses for both its fiscal Q2 and all of fiscal 2024. Mastercard is looking at mid single-digit growth in operating expenses in 2024, and minimal growth in its fiscal Q1 ending March 31.
Both are stellar long-term performers
As I wrote a couple of weeks ago, the market overreacted initially to Visa’s outlook, and since then the stock price has bounced back nicely. It is currently up about 3% since then and has returned around 6% year-to-date. Mastercard has slightly outperformed Visa this year, up around 8% YTD.
The truth is, both of these stocks are stellar long-term performers, benefiting from their market dominance and their relatively simple low-overhead business models that generate huge margins and lots of cash.
Over the past 10 years, Mastercard has had an average annualized return of 20.1% as of Feb. 5, while Visa has an average annualized return of 17.8% – both of which easily outperform the S&P 500. They tend to perform well in various different types of markets, because of their dominance, but they certainly see better results when the economy is strong and consumer spending is up.
Which is the better buy?
I think both of these stocks are good buys right now and would be excellent additions to a long-term portfolio. But if I had to lean toward one as the better option, it would be Visa.
Visa’s projected expenses are higher, but it seems more than manageable as its operating margin is higher than Mastercard’s at 69%, to 56% for Mastercard. Plus, Visa had reduced expenses by 6% in the last quarter, while Mastercard increased spending by 21% in the last quarter.
Also, Visa is trading at a cheaper valuation, with a reasonable forward price-to-earnings ratio of 27, while Mastercard’s is slightly higher at 32.
So, ultimately, Visa looks like the slightly better buy right now between these two excellent stocks.