How Discover Is Gaining Market Share From Visa and Mastercard

Discover Financial (DFS 0.87%) focuses on younger customers, like college students, with only minimal credit history. Though that may seem like a risky strategy, it's paid off for Discover. In this episode of "Beat and Raise" recorded on Jan. 20, Fool contributors Connor Allen and Brian Withers discuss Discover's recent quarter and how the company is gaining market share.

Brian Withers: We are covering another financial tech company Discover Financial.

Connor Allen: We are. Brian, I just want to say I'm excited to get back into earnings season with you, and beyond again, so this is going to be a lot of fun over the next few weeks.

Brian Withers: I love covering eight companies in an hour. It's cool.

Connor Allen: Yeah. It's going to be fun. Discover was not a company that I'm that familiar with, but overall, they had a decent quarter. The market did not approve of the quarter that they had, I believe is down 4-5 percent since they reported earnings.

Brian Withers: They reported yesterday.

Connor Allen: Yes, they reported yesterday. They're a $35 billion company, reported yesterday, like I just said, and as you can see, across over the course of the whole year, they've actually performed very well, being up just under the S&P 500 at 19.5 percent over the last year. It's been a great year for them and there is a variety of reasons for that, but I want to hit on some of the numbers, just the numbers and then talk a little bit about why the numbers were good and why some of them were bad. About their revenue, they had a miss on revenue. So estimates were $3.02 billion. This is primarily from interests. Then they actually only had $2.94 billion, so they had a slight miss there. Earnings-per-share, they did have a beat. So that was good. Net income growth for this company is absolutely incredible. I want to say that, we will hit on that in the highlights a little bit. Then the outlook after Q4, I meant to say Q1 for 2022, this is full-year outlook, I apologize, $12.32-$13.62 billion. This is actually a raise. I meant to say raise there, I'm out of practice, Brian.

Brian Withers: We're all little rusty today. That's all right. [laughs]

Connor Allen: Some of the reasons for this, their net income is pretty incredible from 2020-2021. This is one of the highlights they talked about, full-year numbers. In 2020, they had $1.1 billion net income, and in 2021 they had $5.4 billion. Obviously, we're comparing from the pandemic. If you actually look back to 2019, it was about a nine percent increase in net income from 2019-2021. But at the same time, this company is steadily growing.

In the transcript, the CEO talked about how they achieved two percentage points of market share growth in this past year. That's solid for them. They're competing against the likes of Visa, likes of Mastercard. I am actually a Discover customer. I was young, I didn't have any credit history and so Discover was the first place that I went. I think Discover is really good at on-boarding new customers that are young and don't have any credit history. It seems like that's a target market for them because they don't offer some of the best benefits, I guess you could say, like Visa and Mastercard do and American Express. But they are giving credit cards to a lot of students, to a lot of young people without much history. It looks like their business model is doing pretty well.

They're growing pretty fast. It doesn't seem like they're having problems with their customers being younger and not as much history because that could potentially be a risk for Discover's business because they don't know whether they're going to pay back as well as some older people with stronger credit histories. But their non-interest income was up 35 percent year-over-year. A lot of that is from their digital bank. Then they had $773 million in stock buybacks for Q4. It's good to see. If you're a shareholder you'd love to see some buybacks. One concern is that their payment services business is still running at a loss. Hoping to see that flip in 2022. We'll see, but that's business-to-business payments, something that they call their global card network. But overall, I think Discover had a pretty solid quarter. There's no raging red flags, but there's no big green lights either. It's just like it was a decent quarter overall, pretty good. Nothing to be concerned about.

Brian Withers: I looked through their earnings presentation in the last couple of slides that they had. They talk about their card network and the payments volume. Discover Network was up 25 percent, year-over-year. Pulse was up 18 percent, Diners 17 and their network partners, 29 percent. Really positive is a little bit of a play on the economy. Then they also track quarterly sales volume for gas, groceries, retail, restaurants and stuff. Those are all up. Hardy double-digits across sales trends, 21 versus 2019.

Gas was up 42 percent. Part of that is the higher pricing. Restaurants are up 28 percent over a two-year period. Retail is up 40 percent over a two-year period. They're seeing seeing pretty positive results on the card volume and the transaction volume. A little bit of an indicator to me, the economy picking up and how things have done in the fourth quarter.

Connor Allen: Definitely, if you're talking about Discover, it definitely is an economy play. You look at 2020, the business was not doing great, obviously, because it's a credit card company, so definitely hit it on the head there, Brian.