For years, Visa Inc. and Mastercard Inc. were viewed as somewhat indistinguishable, both benefiting from the same gradual shift toward card-based payments. Recently, however, they’ve started to move apart.
Mastercard MA, +0.79% shares are up 54% over the past 12 months, while Visa V, +0.33% shares are up 36%. And while analysts expect Mastercard to post revenue growth of 20% for its latest quarter, they predict that Visa’s revenue rose by just 7.5%.
Part of the variance in stock performance stems from Mastercard’s big push beyond card swipes and into services. The company has been trying to convince investors that its total addressable market is actually much larger than previously thought—if you go beyond retail and count the more sizable market of business payments, as well as peer-to-peer opportunities.
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“Before, we really attacked mostly $45 trillion of retail payments with a sliver of B2B payments,” CFO Martina Hund-Mejean said at a recent investor conference, referring to business-to-business payments. “And we really widened the opportunity in terms of what we could be doing in the payments industry to $225 trillion.”
Mastercard’s recent acquisition of Vocalink supports that goal. Vocalink enables “real-time, bank-account-based payments,” and Mastercard sees big opportunity in getting businesses to pay each other this way, rather than by check.
Visa is also working to integrate a big purchase, having bought Visa Europe about two years back, but it’s still working through some of the operational and logistical aspects of the acquisition.
“Pricing is complex, but Visa issued a new rate schedule for Visa Europe [in April 2018], which suggests that fees for domestic transactions will drop, while inter-regional and most intra-European fees will increase,” wrote William Blair analyst Robert Napoli, who rates Visa and Mastercard at outperform.
Analysts are wondering if Visa will wind up back on track with Mastercard once it smooths out aspects of the acquisition.
“While we expect Mastercard to maintain its 6% to 7% EPS growth differential versus Visa in this coming quarter, we believe the gap will narrow in 2H18 as Visa laps incentives headwind and undertakes pricing actions for Visa Europe,” wrote Bernstein analyst Harshita Rawat, who’s been discussing the divergence between the two card networks since initiating coverage of them last month.
Rawat, too, rates both stocks at outperform, with a $143 target price for Visa and a $207 target price for Mastercard.
When Visa reports earnings on Wednesday afternoon, it will be worth noting management’s commentary on how the Visa Europe integration is progressing. Mastercard, meanwhile, will provide updates on its services growth when the company delivers results a week later, on Wednesday, May 2.
What to expect:
Earnings: Analysts surveyed by FactSet expect that Visa earned $1.02 for the quarter to end March, up from 86 cents a year earlier. According to Estimize, a platform that crowdsources estimates from hedge funds, academics, and others, the average projection calls for earnings per share of $1.06.
For Mastercard, the FactSet consensus is for $1.25 per share in earnings, while the Estimize consensus is $1.27.
Revenue: According to both FactSet and Estimize, the average expectation is that Visa grew revenues 7.5%, to $4.8 billion.
For Mastercard, the FactSet consensus calls for 20% revenue growth, to $3.3 billion, while the Estimize consensus is for $3.2 billion.
“The law of large numbers means Mastercard’s top-line growth rate is likely to outpace Visa’s,” wrote Jefferies analyst Ramsey El-Assal, who has buy ratings on both names. He has a $200 price target for Mastercard shares and a $145 target for Visa’s.
Stock movement: Visa shares have risen after six of the company’s last earnings reports. The same is true for Mastercard’s stock. Analysts are overwhelmingly upbeat on both stocks, with 33 of the 36 analysts who cover Visa and Mastercard rating the stocks at buy, according to FactSet. The other three have hold ratings. The average Visa price target is $142.82, 15% above current levels, while the average Mastercard target is $194.46, leaving 10.8% upside.
Visa currently trades at a 9% discount to Mastercard based on consensus earnings estimates for the next 12 months, noted Oppenheimer analyst Glenn Greene, who rates both stocks at outperform: “The current discount is the widest since early 2014.”
Matsercard shares are up 16% this year, while Visa shares are up 9%. The S&P 500 SPX, +0.21% is little changed so far in 2018, while the Dow Jones Industrial Average DJIA, +0.23% of which Visa is a component, is down 1%.
What else to watch for:
Investors in Visa and Mastercard have plenty of reasons to anticipate good news this earnings season. To start with, the big banks have reported results, including strong card-volume numbers. Third-party data also suggest that spending was strong during the first three months of the year. And foreign-exchange trends look “favorable,” according to Oppenheimer’s Greene.
It will be important to note effects of the recent tax bill, Greene added. The bill “should prove low-teens accretive (on annual basis net of investments) for both Mastercard and Visa,” he wrote.
For Mastercard, it will be worth watching for figures on switched transactions. “We continue to believe that increasing switching (clearing/settling) transactions remains a significant opportunity for Mastercard,” wrote William Blair’s Napoli. ”Switched transactions rose 17% in 2017 and management disclosed that about 54% of Mastercard transactions are processed on its network globally (up from less than 50% in 2015).”
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As for Visa, Napoli is looking for any new information about the company’s acquisition of Fraedom, a software company that provides payment solutions for financial institutions and their customers.
“We understand that Fraedom has been a longtime partner of Visa and is the SaaS solution that powers Visa IntelliLink Spend Management, a commercial service that helps control spending,” he wrote.
Visa’s management also said in its last earnings release that it would look for “ways to further invest in our business” as a result of anticipated tax-law benefits.