- Visa and Mastercard are a duopoly with more similarities than differences.
- Both have great balance sheets and similar valuation multiples.
- I have outlined a few subtle differences between the 2 companies so interested investors can make a decision.
Visa (NYSE:V) and Mastercard (NYSE:MA) are two very similar companies, and combined have a virtual duopoly on the market. However, while the companies are so similar, there are still subtle differences in the numbers that investors should consider before choosing one over the other. Below I’ve stacked up some comparisons between the two.
Round 1: Growth
Revenue growth between Visa and Mastercard is very similar. Visa has a 3-year growth rate of 10% while Mastercard has a 3-year growth rate of 9.4%. However, Visa is more established in size, with revenue being 45% greater than Mastercard’s at $14.1 billion vs $9.7 billion over the trailing twelve months. With Visa being the significantly larger company and still outgrowing Mastercard, I would give the edge to Visa.
Round 2: Balance Sheet Risk
Up until recently Visa was operating with no burden of debt on their books. However, in their most recent quarter, they have taken on a sizable amount of long-term debt and have also improved their liquidity position. Mastercard has carried some debt but also bumped it up in their last quarter as well. Visa now has about $15.9 billion in long-term debt and Mastercard has only $3.3 billion.
However, Visa now has upped their cash position from $3.5 billion to $12.8 billion, compared to Mastercard’s $5.7 billion. Visa’s cash and cash equivalents are more than twice their current liabilities while Mastercard has a cash ratio of 0.9. Putting cash, current liabilities, and long-term debt all into perspective, you will notice their balance sheets look slightly different but have very similar strength.
If we compare the overall tangible value on their balance sheet compared to where they trade, you can see below that Visa is the one currently trading at a better value. Both companies have very strong balance sheets with little to negative net debt, however when compared to their market cap it looks like Visa has become the one trading at the slightly better value within the last few months, so I would give the slight edge again to Visa.
Round 3: Valuation
Probably the most important round when comparing 2 very similar companies. Everyone wants to get the best bang for their buck. Visa’s bottom line is stronger and faster growing than Mastercard’s. Visa has an operating margin of 65.6% compared to Mastercard’s 52.5%. Visa has 3-year net income growth rate of 43.4% compared to Mastercard’s 11.3%. But if we put it in perspective to their market caps, they both trade at about the same PE multiple.
If we look at the trailing twelve months, Visa has free cash flow of almost $6.4 billion, which is 72% higher than that of Mastercard, but with Visa’s market cap more than 52% higher than Mastercard’s it’s not as much of a disparity. With multiples being so close, the only way to grasp value on these companies is to throw it back to growth and margins. With Visa having the larger market share, better historic growth, and better margins, I believe investors will feel they are getting a better value with slightly less risk in Visa.
If I had to choose between Visa and Mastercard stock for an investment I would go with Visa stock. They carry a little less risk and seem to edge out Mastercard in most categories. However, if there is another takeaway from this comparison, it is that maybe investors should look towards other opportunities for value, like American Express (NYSE:AXP) or Discover Financial (NYSE:DFS). Looking at Visa and Mastercard it seems like they are trading very efficiently right now, whereas American Express has become cheaper following their down year in 2015, and Discover is trading at a low Price/FCF of only 5.5. But if you want to invest in the duopoly between Visa and Mastercard, I would allocate more assets towards Visa.