While monopolies tend to get a lot of investor attention (and plenty of regulatory scrutiny), there are some duopolies out there too that might warrant a closer look. If done responsibly, there's nothing wrong with duopolies existing and operating, and investors can make an excellent return for owning one (or both) parts of a duopoly.
Investors right now ought to consider investing in one duopoly in particular: card-issuing leaders Mastercard (MA 0.15%) and Visa (V -0.59%). While there are other credit/debit card issuers, these two firmly control the top two positions. Both stocks have been phenomenal investments over the past decade, with Mastercard returning 671% and Visa returning 503% -- far surpassing the S&P 500's 225% return.
Each company has enviable financial metrics and both reported solid quarterly results recently, but which stock between the two is the best buy for the future?
Visa's balanced approach didn't outperform Mastercard's this quarter
The first thing to understand about these two is that they don't face direct financial risk for the cards they issue. That burden falls upon the banks that Visa and Mastercard partner with and service the cards. This reduces the downside risks to Visa or Mastercard when the economy sours because they aren't stuck booking the losses when consumers default on their account debts.
When you invest in Visa or Mastercard, you're investing in their vast payment processing networks. Whenever a digital transaction occurs using one of their cards, Visa and Mastercard are responsible for getting funds from one party to the other, and they take a small fee for providing that service.
The markets these two focus on are also quite different. Visa has a stronger foothold in the U.S., while Mastercard is more of an international play. This is evident when you look at the breakdown of their domestic and "rest of world" payment volumes in the fiscal quarter that ended Dec. 31.
| Company | U.S. Payment Volume | "Rest of World" Payment Volume | Total Payment Volume |
|---|---|---|---|
| Visa | $1.480 trillion | $1.449 trillion | $2.929 trillion |
| Mastercard | $699 billion | $1.434 trillion | $2.133 trillion |
Sources: Visa and Mastercard.
Visa's volumes are about evenly split between international and domestic, while two-thirds of Mastercard's volume comes from international sources. Still, this difference didn't much affect either company's latest quarterly results, as both reported year-over-year revenue growth of 12%.
However, Mastercard did a better job controlling its expense growth. Operating expenses only rose 10% for Mastercard, while Visa's surged 25% higher. This will be an essential item to watch in subsequent earnings reports because when operating expenses rise faster than revenue, the result is usually falling earnings -- something Visa didn't experience during its fiscal 2023 first quarter (which ended Dec. 31).
Both companies' net income rose by 6% despite Visa's higher operating expenses. That's primarily due to Mastercard's higher tax rate, but minuscule bottom-line growth is something investors need to watch out for.
Based on the snapshot of their last quarterly results, it isn't easy to separate them for doing anything differently. So which one is the better buy? The answer lies in each stock's valuation.
Mastercard's stock trades at a slight premium
Since both businesses are mature, the price-to-earnings ratio is the best way to value these companies. Both currently trade very close to their nine-year average by that metric.
V PE Ratio data by YCharts.
It's also evident that by that metric, Mastercard's stock commands a premium compared to Visa's stock. Again, that's because of its international exposure. The market opportunity in foreign countries is expanding much faster than in the U.S. as the global middle class continues to grow.
Regardless, many investors might point out that a price-to-earnings ratio above 30 is relatively high, and they'd be right. However, Mastercard and Visa both have world-class profit margins. Because of this, both stocks understandably trade at a premium to businesses with much lower profit margins.
Which payment processor's stock is the better buy?
So which one is the better buy? I don't think you can go wrong with either, but for the long term, it's hard to bet against Mastercard's international exposure. It helped Mastercard outperform Visa once and will likely do so again. And its operating expenses are growing more slowly than Visa's, which is a good sign that Mastercard is right on track.
