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What Drove Visa to an All-Time High, and What Sent PayPal Lower

By Motley Fool Staff - May 3, 2018 at 8:43PM

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A second-quarter earnings beat and strong guidance get some of the credit for the first while issues of valuation and a bit of short-term thinking for the other.

In this segment of the Motley Fool Money podcast, host Chris Hill is joined by senior Fool analysts Jason Moser, David Kretzmann, and Jeff Fischer for a discussion of a couple of financial stocks. First, Visa's (V -1.21%) latest results, which show that the war on cash continues to be a great place to make money. Its earnings-per-share growth forecast is impressive, global economic growth means more transactions, credit card use relative to cash is rising -- and then there are the international opportunities. The Fools consider the future and the investment thesis for this backbone of the financial services segment.

They then chat about one of their favorite war on cash stocks, PayPal (PYPL -2.61%), which reported its first-quarter results last week. And as the Fools point out, by every measure, it's a strong business turning in strong numbers. Should you open a position?

A full transcript follows the video.

This video was recorded on April 27, 2018.

Chris Hill: Shares of Visa hitting an all-time high this week after second quarter profits came in higher than expected. They also raised guidance. Jeff, Visa, they're not going to get to $1 trillion first, but they are closing in on a market cap of nearly $300 billion.

Jeff Fischer: They are. And even at that size, they grew revenue 13%, and they grew earnings per share 30% year over year. Now, 10% of that was thanks to the new tax law. So, without that, they grew around 20%. Still really impressive. For the whole year, they expect earnings per share to grow in the high 20% range. The stock trades at that same multiple to earnings, so it looks reasonable.

What's happening, Chris, is economic activity continues to pick up around the world. Plus, cash continues to get eaten away by credit card usage. And, there's been a lot more cross-border economic activity, which is high margin, even higher margin, for Visa and Mastercard (MA -1.09%). And, there's India to consider. 1.4 billion people there. Visa is the market leader there by quite a wide margin, has all the deals in place, and it's still just getting started there. It sees a lot of opportunity in India. It's also filed to start transaction business in China, which is still a few years down the road, but still.

Hill: Is that a big market?

Fischer: It's fairly big, it's about the size of New Jersey. [laughs] So, a majority of the world is still in the future for Visa. Meanwhile, the company is celebrating its 10 years on the market. It went public 10 years ago already, which is hard to believe. An 837% return for those Fools who bought and kept the stock. I don't think it'll do 800% again in the next ten years, but I could see 200-300%.

David Kretzmann: The thing that really appeals to me when it comes to Mastercard and Visa is, they're almost platform-agnostic. Whether you're paying through PayPal, Square, Stripe, any of these different platforms, you're usually going to be using your Visa or Mastercard credit card. They just seem like companies that are going to win almost regardless of which of these platforms end up duking it out and coming out on top.

Fischer: So true, David, and a great point. They have relationships with Square Cash and Venmo and a giant relationship with PayPal. So, you're right, they're integrated in all these new ways to pay, as well.

Hill: Speaking of Venmo, PayPal's first quarter profits rose 33%, but that wasn't enough to keep shares from PayPal falling just a little bit this week. I'm assuming, Jason, this is due to valuation, because there was a lot to like in PayPal's quarter.

Jason Moser: Yeah. I mean, I think it's the voting vs. weighing. We tend to look longer-term, weighing these companies. You can't really speak to the market voting in the short-term. It's funny, I always get a funny look when people ask, "What's one of your favorite stock ideas out there?" And I say, "PayPal." And they look at me funny like, "PayPal? Really?" They just don't get it. Let me see if I can elaborate here a little bit.

In the quarter, revenue was up 24% to $3.7 billion. 2.2 billion payment transactions went through PayPal platforms. $132 billion total payment volume. 237 million active accounts. They processed $49 billion in mobile payment volume in the quarter. That was up 52% year over year. Mobile payments now represent 37% of the business' total payment volume. So, there are a lot of big numbers there.

That's all to say that PayPal has done a very good job at building out a tremendously valuable network that provides a very valuable service for a lot of people. And I'll tell you what, we were just talking about this race to $1 trillion, and I think I know the way that Microsoft gets there first -- they buy PayPal. Right? I mean, they need that mobile presence, and that would be tremendous right there. They actually have the cash on the balance sheet, they could make a nice little offer and probably do that, if antitrust would let it slide.

Hill: If you're a PayPal shareholder, do you want that to happen?

Moser: [laughs] No! I am a PayPal shareholder, and I don't want that. I'm just simply making the point that, if Microsoft wants to win this race, that could be one way to do it.

Fischer: Why are you giving them that idea, then?

Moser: You're supposing they're listening. I don't know that that's the case.

Fischer: Somebody at Microsoft is.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of PayPal Holdings. David Kretzmann owns shares of Mastercard and Square. Jason Moser owns shares of Mastercard, PayPal Holdings, Square, and Visa. Jeff Fischer owns shares of Mastercard, Square, and Visa. The Motley Fool owns shares of and recommends Mastercard, PayPal Holdings, and Visa. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Mastercard Incorporated Stock Quote
Mastercard Incorporated
$355.33 (-1.09%) $-3.92
Visa Inc. Stock Quote
Visa Inc.
$214.52 (-1.21%) $-2.62
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$99.42 (-2.61%) $-2.66

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