Visa vs Mastercard; Which Should You Back?

Between the two of them, these payment titans control about 90% of the global credit and debit card market. It’s an industry that’s going nowhere and Visa (NYSE: V) and Mastercard (NYSE: MA) effectively run it as a duopoly. Few other industries operate with such high barriers to entry which means investors can get involved with a decent level of confidence about each companies’ revenue streams, margins, and profit, both now and in the future.

Cash and check continue to trend downwards in terms of method of payment while the threat from cryptocurrencies hasn’t materialized in any kind of form compared to what the hype suggested in 2017. Contactless payments through Amazon (NASDAQ: AMZN) or Apple Pay (NASDAQ: AAPL) style wallets as an alternative payment method have yet to see wide-scale adoption and will take many more years to reach full market saturation.

So all in all, Visa and Mastercard’s position as industry behemoths is fairly secure. So unsurprisingly, over the past decade, there’s been very little between them in terms of stock performance. With innovation and investment in the fintech space at all-time highs, many on Wall Street are looking at the payments industry as being one ripe for disruption and both have been active in making regular acquisitions of any up and coming startups to bolster their portfolio. They’re both pretty similar in market cap, Visa’s $410 billion slightly ahead of Mastercard’s $305 billion, and they both offer a similar dividend yield, 0.62% compared to 0.52% respectively. Their core businesses are for all wants and purposes identical, so which one should you back?

Fundamentals

From a numbers standpoint alone, Visa can be considered the heavyweight of the two as they lead in both market cap and revenue. Their fiscal Q2 earnings, released at the end of April, came in ahead of analyst expectations and showed almost 7% growth year over year in revenue that topped the $5.85 billion mark. Mastercard reported their Q1 earnings a day earlier and posted $4 billion in revenue which was ahead of analyst expectations but still only 2.8% growth year over year.

That being said, last quarter may have been a coronavirus related anomaly as Mastercard has consistently been growing its revenues at a faster rate to Visa in recent years. In 2018 and 2019 for example, they grew revenues by 20% and 13% respectively compared to Visa’s 12% and 11% over the same period.

For many, this faster pace is the result of Mastercard doing its best to eat into Visa’s market share as defined by transaction numbers. Visa Debit for example is used in well over 40 billion transactions a year compared to the 18 billion that use Mastercard Debit.

The coronavirus pandemic and associated restrictions and lockdowns certainly reduced core volume and transaction fees for both names for much of the first half of the year, but the knock on effect in terms of increased e-commerce business has helped to offset any short-term downside.

Stock Performance

In recent years, Mastercard’s stock has performed better than Visa’s and this could be an important factor for investors considering getting involved now. From the start of 2019 through mid-February of this year, Mastercard shares rallied close to 80% compared to Visa’s 60%.

While both stocks saw huge selling into March, it was Visa’s stock which fell further and Visa’s stock that has recovered less. Mastercard’s stock is up 23% since from the lows while Visa is ‘only’ up 19%. This fits the narrative mentioned above of Mastercard’s current momentum outpacing Visa even if the latter is the bigger company. This has been seen in the percentage growth numbers from recent quarters and in the share price action of recent months.

Investors thinking about getting involved have on the one hand the far and away from the industry leader but on the other, a close second who’s starting to nip at the leader’s heels. Hard to say that either would be a losing position.