American Express (AXP 1.39%) is up 160.4% in the last five years compared to a 73.7% gain in the S&P 500 (^GSPC 1.52%).
American Express remains a solid buy, but Visa (V 0.81%) is even more compelling.
Visa's high-margin business model
Visa is a pure-play payment processor that isn't responsible for the credit risk of the cards on its network. Rather, it partners with financial services companies and banks.
For example, JPMorgan Chase (JPM 1.72%) issues and bears the credit risk of the popular Chase Sapphire cards, while Visa's network connects merchants to Chase to approve transactions.
Image source: Visa.
American Express is both the payment processor and card issuer -- making it an inherently riskier investment than Visa. But American Express has an exceptional track record of managing risk. Its cards have relatively high annual fees. And it attracts affluent customers with generous rewards programs. These rewards programs are expensive, and they are among the highest costs for American Express. By comparison, Visa doesn't have to worry about those costs -- because again, it isn't issuing the cards.
As a result, Visa is a capital-light, ultra-high-margin business. Expenses cover labor, cybersecurity, network management, and marketing. But it doesn't have to invest a lot of capital to make money, which is a big advantage compared to capital-intensive companies.
Because Visa has such high margins and has historically generated consistent growth, it has commanded a higher valuation than American Express. But American Express has outperformed the S&P 500 for five consecutive years, whereas Visa is down 11.2% over the last year.
Visa is currently trading at a discount to its five-year median price-to-earnings (P/E) and price-to-free-cash-flow (FCF) ratios, while American Express is trading at a premium.
V PE Ratio (5y Median) data by YCharts
Caps on credit card interest rates
Visa, Mastercard (MA 1.39%), and American Express are down between 8.8% and 10.4% year to date, even though the S&P 500 is roughly flat. Consumer spending concerns and a proposed 10% cap on credit card interest rates may be spooking some investors.
The 10% cap concerns are arguably overblown because if that were to go into effect, lenders would limit credit access for consumers with lower credit scores -- which could lead to increased use of payday loans and other higher-interest options.
Payment processors generate high margins largely because the fees they collect on transaction volume and frequency are so high. A cap between 10% and the more common 20%+ annual percentage rate would impact issuer margins -- like JPMorgan Chase and American Express -- but not Visa or Mastercard directly. However, it would indirectly impact these companies because their networks would shrink, and transaction volume and frequency would fall.
Visa is one of the best stocks to buy now
Visa is better positioned to handle economic uncertainty and industry policy changes than American Express. The recent sell-off makes its valuation very compelling.
American Express has a slightly higher dividend yield at 1% compared to 0.9% for Visa. Both companies regularly buy back stock and have drastically reduced their share counts over time -- which has accelerated earnings growth.
Visa is a high-margin cash cow of a business, with international exposure and a rock-solid balance sheet. It is the undisputed industry leader and is frequently cited as being the most accepted card brand worldwide, with the most credit and debit cards in circulation.
Companies as high quality as Visa rarely go on sale. But right now, investors can buy Visa at a multi-year low valuation.
All told, Visa is the kind of stock that will appeal to dividend, value, and growth stock investors alike, making it a foundational holding worthy of building a portfolio around in 2026.
