Visa vs. Mastercard: Which Should You Buy?

With the exception of American Express (NYSE: AXP  ) , investors have only recently been able to grab a piece of the credit-card market. For years, the big players were controlled by thousands of banks around the globe. But both Visa (NYSE: V  ) and Mastercard (NYSE: MA  ) are now independent companies, and Discover Financial Services (NYSE: DFS  ) was released from its former parent Morgan Stanley last summer.

Choices galore! Let the games begin!

A battle of twins?
Now that investors have a gaggle of credit card providers to choose from, which, if any, are worth your money? The contest is likely centered on a brawl between Visa and Mastercard. Why? Both are enormous, popular, nearly identical in operations, and have exploded from their respective IPOs.

First, an overview. Perhaps the greatest misconception about Visa and Mastercard is that they're on the hook for the losses attached to delinquent credit card bills. Not so. Neither extends credit to cardholders, or takes responsibility for consumers up to their eyeballs in debt. Banks like Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) provide the money and handle the debt, for better or worse; Visa and Mastercard just facilitate the transactions.

Still with me? Good. Now let's look at some of the numbers from last quarter:

Metric

Mastercard

Visa

Market cap.

$35 billion

$77 billion

Revenue

$1.18 billion

$1.45 billion

Global market share

28%

60%

Net income

$447 million

$314 million

Net margin

37.8%

21.6%

Average 2008 EPS Estimate

$8.73

$2.04

2008 P/E

30x

34x

Increase in transactions processed

15.7%

15%

Nothing here should really jump out at you. Visa is more than twice the size of Mastercard in terms of market cap. Both have healthy profits. Both trade at relatively high multiples to expected earnings. Looking for a distinction between the two? At this vantage point, we might be able to come up with one hazy assertion: Mastercard is smaller, so its prospects for growth -- all else being equal -- might be better than Visa's.

You're more right than you know
Ahh, and that's where things get exciting, Fools. You see, before Mastercard and Visa ventured into the public markets, they were owned by thousands of membership banks. When it came time to go public, a choice had to be made about what to do with a lucrative market: Europe. Why is Europe so lucrative for credit card processors? The integration of the single-currency Euro over the past decade brought prospects of exceptional growth, since intercountry commerce became less cumbersome.

When Visa went public, it left its Visa Europe organization separate from the shares you and I can purchase. Visa Europe is still owned by some 4,600 European banks, and operates as a licensee of the Visa you can purchase stock in. With Mastercard, however, you get the European operations when you purchase the stock. All of it. It's all included in the public company.

What's the growth potential like in Europe? In 2007, Mastercard processed over $2.2 trillion worth of transactions. From this amount, $659 billion came from Europe -- 16.2% more than the year before. To put that growth in perspective, the United States registered growth of 10.4%. The Asia/Pacific region -- obviously known for booming economic expansion -- clocked 17.1% growth. That Europe's growth was able to nearly match the Asian region is testament to how lucrative it is for shareholders -- growth you'll get only with Mastercard.

The verdict
These are both stellar companies, providing investors a chance to participate in the near duopoly they enjoy. If you're mulling over investing in either, it might be easy to view the size and strength of Visa as evidence of it being a market powerhouse. It is. But that alone shouldn't set the tone of your decision. Just as investors in Blackstone and Fortress Investment Group have learned, sometimes shareholders don't always get the most lucrative portion of the company's pie.

Because Mastercard lets investors in on the European action, its growth prospects going forward are likely a notch ahead of Visa's.

Your turn
Our 110,000-member CAPS community currently rates Visa a 4-star pick, while Mastercard holds a neutral 3-star status. What do you think about their potential? We'd love to hear from you over at CAPS. Click here to come on over and share your input.

For more Foolishness:

JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. Discover Financial Services and American Express Company are Motley Fool Inside Value picks. The Fool owns shares of American Express Company. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Inside ownership: $100. Shady manipulation: $200. The Fool's disclosure policy: Priceless.


Read/Post Comments (11) | Recommend This Article (20)

Comments from our Foolish Readers

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  • Report this Comment On July 22, 2008, at 4:45 PM, tushar707 wrote:

    Interesting. I just am wondering one thing.

    For a long term value investor wouldn't Visa be better. I say this because if I invest now, the potential for growth is much in Visa, since eventually the European "branch" of Visa will also become public. All I am saying is that there is more growth availabe from my view point. I dont know if my logic makes any sense. Please let me know if my thinking is flawed since I only recently have got stock analysis.

  • Report this Comment On July 22, 2008, at 4:53 PM, tacolagolf wrote:

    Anyone knows what, if any, benefit V shareholders will get when they decide to IPO the European operations? Does V currently derive any revenue from Europe? Thank you.

  • Report this Comment On July 22, 2008, at 5:33 PM, stockjock43 wrote:

    I like V much better. Why? Because Visa is a $72 stock with a lot of room to run. Whereas Master card may have the Euro exposure but its already at $273 a share! I think the chances of Visa hitting $144 are a lot better than Master card hitting $546! Tha tis not to say Master card won't but Visa will get to $144 a lot quicker...jmho

  • Report this Comment On July 22, 2008, at 6:03 PM, option37 wrote:

    Although Visa Europe is not part of VISA Inc., revenues are still realized by Visa if the issuer is not from Europe. Any transactions where either the acquirer (merchant's bank) or the issuer (banks issuing the cards) is not from Europe, Visa realizes revenue.

  • Report this Comment On July 23, 2008, at 3:37 PM, xxnileshxx wrote:

    Here is why you do not get benefit form visa europe. "Visa Europe is still owned by some 4,600 European banks, and operates as a licensee of the Visa you can purchase stock in."

    It is owned by European banks not VISA inc. They only get the licensing fee. Which is probably lot less then if they owned Visa Europe. On valuation basis MA is lot cheaper the V and lot smaller then V so more room to grow. Also notice MA has much higher Margins and higher transaction rate then V. All said MA is a better bet for long term. Short term there could be some tough time as economy slows around the world and pending legislation in US related to transaction cost. In any case both company's have very sound business model and thriving business. Currently I am looking to enter this companies on weakness.

  • Report this Comment On July 24, 2008, at 7:59 AM, DontGetSuckered wrote:

    In response to the question asked, "....Anyone knows what, if any, benefit V shareholders will get when they decide to IPO the European operations? Does V currently derive any revenue from Europe?......"

    The Answer - Visa does derive substantial revenue in terms of licensing fees from Visa Europe. Visa Europe still uses Visa Inc's processing technology and payment networks.

    And most important of all, when Visa Europe was being spun out of Visa Inc. as a separate entity, the two entered into an agreement where Visa Inc. has the right to first refusal to purchase "all or substantially" all Visa Europe's shares in a tax free transaction to both entities. So, soon or later, Visa Inc. shareholders will get the action from Visa Europe, should Visa Europe be sold or goes public.

    Don't be suckered in! What people won't tell you is that Visa Inc. has a much wider presence and integrated network in Asia and Latin America than MasterCard, not to mention its larger dominance in Europe and North America. There is a reason why Visa is selling for a higher multiple than MasterCard. And the best of al, Visa has more room to grow than MasterCard, not only in Western World but more importantly in Asia and Frontier Markets.

    Don't be suckered in, hold and accumulate Visa over MA.

  • Report this Comment On July 24, 2008, at 8:18 AM, DontGetSuckered wrote:

    Another important piece of information......When Vias Inc. was going public, they did a smart thing by spinning of Visa Europe in a stand alone company after extensive legal consultation. European Union is cracking down on Visa and MasterCard in anti-trust / anti-competitive trade practices So, by separating Visa Europe in a stand alone company, Visa Inc shareholders are insulated from any future liabilities or anti-trust measures EU might take. MasterCard on the other hand is on the hook big time. That is why Visa is selling at a higher multiples than MasterCard, and best of all, Visa Inc. still get to participate in Visa Europe's upside. , so, Don't get suckered in!

  • Report this Comment On August 21, 2008, at 12:04 PM, mikejw wrote:

    I think Discover is the better bet. They just purchased Diner's Club to get international exposure. With a market cap of 7 billion, they have more room to grow. Since they are vertically integrated, didn't extend too much credit in during the real estate boom, and have a very high quality custom (high average FICO score) I think they have room to grow. I know Master Card and Visa have the lion's market share but Discover has a chance to take market share. I hope they don't blow it! Just my two cents and I do own DFS but do not own MA or V.

    mikejw

  • Report this Comment On August 22, 2008, at 4:22 PM, Litskywd wrote:

    Own them both! Neither will disappoint, in the long-term!

  • Report this Comment On October 26, 2008, at 8:35 AM, JamesMoriarty wrote:

    Avoid Visa.

    Visa are behind the technology curve and are being hurt right now.

    MasterCard are making serious inroads into the lucrative corporate card market.

    They have new technology that gives corporates control of how their cards are used. Its an accountants wet dream.

    I think the platform is called inControl.

    Anyway several corporates are already live with the technology and quite a few heavy hitters are adopting it.

  • Report this Comment On May 24, 2010, at 1:33 AM, olivia1002 wrote:

    This is a wonderful opinion. The things mentioned are unanimous and

    needs to be appreciated by everyone.

    --------

    <a href="http://www.mastercards.info" rel="dofollow"> http://www.mastercards.info</a>

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