Visa (NYSE: V) is back in the news after the payments network announced its purchase of Plaid for $5.3 billion. Both Visa and Mastercard (NYSE: MA) are among the top picks for 2020 for several brokerages. It is therefore worth revisiting the Visa vs. Mastercard comparison we published in April last year.
In the previous comparison, we concluded there was no clear winner, but that Visa may have a slight edge. Our reasoning was the fact that Mastercard’s earnings growth would need to accelerate to reach analyst targets, while Visa’s valuation would be justified if the same growth rate continued.
Mastercard’s Valuation Premium Widens
Since that analysis, Visa’s share price has risen by 20%, while Mastercard’s has increased by 9.6%. However, Mastercard’s valuation has increased substantially. Its trailing earnings multiple is now 47, while its forward multiple is 34. These multiples are now well ahead of Visa’s which are 38 and 27, respectively.
While Visa’s share price outperformed, the widening valuation gap appears to reflect Mastercard’s faster earnings growth over the past 12 months. Mastercard has also managed to grow its dividend 32% while Visa’s dividend grew 20%.
When we compare the income statements in more detail, the growth metrics of the two companies are neck and neck. Mastercard grew revenue slightly faster over the past 12 months after Visa’s revenue growth dipped in the third quarter. However, Visa grew normalized EPS and EBITDA at a meaningfully faster rate.
Visa is still well ahead when it comes to profitability. By nearly every profitability measure, Visa is the more profitable of the two companies. This is most starkly illustrated by the fact that Visa, which has a market value of $420 billion, generated $11.6 billion in income last year. Mastercard, which is worth $312 billion or 75% of that, generated $6.8 billion, or 58% of Visa’s income.
As we pointed out last year, to achieve analyst estimates, Mastercard will need to grow earnings at a faster rate in the future than its historical growth rate. Visa, on the other hand, will only need to maintain its growth rate. If Mastercard wins substantial market share or improves its profitability meaningfully, its stock price will outperform. However, the current valuation leaves room for disappointment if earnings fall short.
While Mastercard’s faster dividend growth is a reason for optimism, both companies have quite low yields. Ultimately, earnings growth will overshadow dividends in the greater scheme of things.
The two stocks have been very highly correlated over the last 12 months but may reach an inflection point in the next few quarters. If Mastercard fails to justify its premium valuation, Visa’s outperformance will continue, and Mastercard may even correct. But, if Mastercard’s higher growth rate proves sustainable, investors may begin switching from Visa. The next few quarters will be key.