The fintech industry currently holds a 2% stake of the global $12.5 trillion financial services industry, according to BCG. Visa Inc. (V, Financial) and Mastercard Inc. (MA, Financial) are considered traditional finance players. However, these businesses are continually innovating and building out their strong competitive advantages, which include immense scale and brand power.
In this analysis, I will explore which is a better investment right now. Let’s dive in.
Visa
Visa (V, Financial) operates one of the largest payment processing networks in the world. The company has 52.6% market share in the U.S and greater than 60% in Europe, according to data from Statista.
Its network effectively acts as an electronic toll road, taking a small percentage of every transaction done across its network.
This is a fantastic business model, as Visa is embedded right in the heart of the transaction value chain. Its business sits between cardholders and card issuers (banks and financial institutions).
Visa is also a master of branding as its logo is embedded on every card and at every online payment terminal, promoting trust.
There were fears that a company such as Visa would be disrupted by the move away from traditional cards toward virtual cards and even cryptocurrency. However, the company has continued to stay ahead of the curve, being one of the first companies to tokenize their cards for mobile wallets.
In the world of cryptocurrency, Visa has continued to be at the forefront. The business has partnered with over 64 crypto exchanges, including Coinbase (COIN, Financial), BlockFi and Circle. For example, the company launched a crypto-powered card specifically with Coinabse, which enables a customer to use their cryptocurrency for daily purchases. Further, at point of sale, its number of merchants accepting crypto has grown to close to 100 million.
Visa has also recently signed a partnership with crypto payments app Wirex to help expand to the Asia Pacific region and the U.K.
There were fears the collapse of FTX would put a halt on crypto investments. However, Visa’s head of crypto debunked those claims, according to one CoinDesk article.
Strong financials
Visa reported strong financial results for its fiscal third quarter of 2023. Its revenue of $8.12 billion beat analyst forecasts by $58.88 million and increased by 11.66% year over year.
Overall payments volume rose by 9%, with U.S.-specific payments volume increasing by 6% year over year. Despite the macroeconomic headwinds, it was interesting to discover U.S. payments volume is up a solid 54% since 2019. This indicates the consumer payments market is still strong.
U.S. credit grew by 5% and debit by 6% year over year, in line with expectations.
Cross-border travel is still recovering, with increased travel into Asia and Europe.
Visa’s new flows and value-added services have also continued to grow by a solid 20% year over year. This was driven by services such as Visa Direct, which enables real-time payments. Total Visa Direct volume rose by 20% year over year to a staggering $1.8 billion.
This has been leveraged by popular products such as Block’s (SQ, Financial) Cash App, which has 53 million monthly active users and leverages Visa Direct, having recently renewed its partnership. Visa Direct is now expanding to Latin America, with products such as Lula in Bolivia, using the platform. In France, Visa direct has partnered with Lydia, a leading peer-to-peer payments platform with 7 million users.
Visa is in a powerful position to leverage its vast network of user transaction data. Therefore, it was not a surprise to see the company report 15% growth in its data processing segment.
Profitability and balance sheet
Moving on to profitability, Visa reported operating income of $5.48 billion, which increased by 12.66% year over year. This was a positive result given its non-GAAP operating expenses rose by 10% year over year. This was mainly driven by extra headcount, which is positive given most companies are laying off workers in this economy.
Overall, the business reported solid earnings per share of $2.16, which beat analyst forecasts by 14 cents.
The company bought back a staggering $3 billion worth of stock during the quarter at an average price of $229 per share. In addition, Visa paid out $937 million in dividends at a 0.77% forward dividend yield.
Visa has a fortress-like balance sheet with $18.756 billion in cash and short-term investments. In addition, the company reported total debt of roughly $20 billion, of which the majority is long term.
Valuation
Visa trades with a price-earnings ratio of 31, which is lower than its five-year average, despite being seemingly high relative to the market.
The stock also trades at a price-sales ratio of 16, which is cheaper than its average over the same period.
Mastercard
Along with Visa, Mastercard (MA, Financial) is one of the big two card network providers globally. Mastercard has a 23% market share in the credit card market, behind Visa at 50%, but above American Express (AXP, Financial) at 19.6%.
Mastercard also has a strong market position in many European countries. For example, in the Netherlands and Sweden, the company as an 80% and 70% market share.
The company has recently launched its artificial intelligence-powered technology (Brighterion) in the Middle East in order to help with fraud detection. In a U.K. study, where a similar technology was used, the cost savings across the network was estimated to be close to $100 million, which is substantial.
Growing financials
Mastercard reported strong financial results for the second quarter of 2023. The business reported $6.27 billion in revenue, which beat analyst forecasts by $96 million and rose by 14% year over year. This was a slightly faster growth rate than Visa.
In terms of profitability, the company reported $3.6 billion in operating income, which rose by a solid 15% year over year.
Its selling, general and administrative expenses increased 13% to $2.4 billion, but its overall profitability growth was still solid.
The company also has a strong balance sheet with $6.5 billion in cash and short-term investments. Visa does have high total debt of $15.6 billion, but the majority of it is long term.
Valuation
Mastercard trades with a price-earnings ratio of 39, which is cheaper than its five-year average but higher than Visa's multiple.
The stock also trades with a price-sales ratio of 17, which is below its average for the same period.
Final thoughts
Both Visa and Mastercard are tremendous companies. Visa looks to have a slight edge in terms of market share and revenue. The business also trades at a cheaper valuation. Therefore, Visa is my preferred bet to invest in out of the two. The company is also embracing cryptocurrency more than Mastercard. This strategy could pay off, but given the crypto winter we are currently facing, it could also be a headwind.
