Mastercard's Potential for Creating Wealthy Individuals?
American Express (AM) 0.51% and Discover Financial Services (DFS) 0.97% might not have the same market dominance as Mastercard (MA) 0.13% and Visa (V) 0.76%, but they are also significant players in the payment processing world. Mastercard and Visa have given outstanding returns to investors through the years, with Mastercard's stock skyrocketing over 500% in the last decade alone. However, should you consider Mastercard the best investment right now? Maybe conducting a bit of competition analysis before investing would be beneficial.
What is Mastercard's Role?
Although some people associate credit cards in their wallets as Mastercards or Visas, the truth is that other firms issue these cards. Those logos only indicate that Mastercard and Visa handle the backend work of approving and monitoring the usage of those cards. It's important not to undervalue the significance of Mastercard (and Visa) technology and global network, which is nothing short of remarkable. Additionally, the security systems are top-notch.
Mastercard's income source is minuscule fees for every transaction that moves through its network. Even a handful of cents or a few dollars doesn't seem like much, but when dealing with $2.5 trillion worth of transactions in a single quarter, the numbers add up. Revenue and earnings have been relatively consistent on an upward trajectory for years, demonstrating the strength of Mastercard's core business.
Mastercard has been leading the shift from cash to card/digital payments. With the rapid growth of online shopping, this transition is set to continue, and given the importance of maintaining secure transactions, the two leading payment processors have a secure industry position due to their ability to constantly update their processes and systems. There is good reason to believe that investing in Mastercard will yield positive returns in the long term, provided you hold onto it for an extended period.
Is Mastercard the optimum choice today?
Although there are numerous positive aspects of Mastercard's business, similar positives can be attributed to Visa as well. In fact, both companies have comparable long-term growth figures (though Mastercard's short-term performance has been more robust). However, there is a subtle difference in the pricing for these two stocks today, and it shows up in their valuation ratios.
For instance, Mastercard's price-to-sales (P/S) ratio is around its five-year average. On the other hand, Visa's P/S ratio is slightly under its long-term average. The same is true for the price-to-earnings (P/E) ratios of both companies. Using conventional valuation metrics does not indicate that Mastercard is overpriced but when compared to its main competitor, Visa seems more reasonably priced.
The gap in dividend yields also adds to the case for Visa. Mastercard's yield is approximately 0.5%, while Visa's yield is 0.75%. Although neither yield is substantial, Visa's yield is 50% higher. Additionally, Visa's dividend yield is towards the high end of its historical yield range, while Mastercard's yield is more in the middle.
Overall, from a valuation perspective, Visa appears more attractive compared to Mastercard, despite sharing many of the same business attributes that support Mastercard's long-term investment appeal. Even though you could argue that Mastercard's faster short-term gains reflect its superior growth, the similarity between the two businesses suggests that Visa is currently underpriced in relation to its long-term potential. Therefore, if Mastercard can help you attain millionaire status, it would seem that Visa, at a more attractive pricing and dividend, could achieve the same goal in the long term.
Mastercard's consistent revenue and earnings growth can be attributed in part to the significant fees it earns for each transaction processed through its network, even if these fees seem modest on an individual basis. As a smart investor, you might consider evaluating the valuation ratio of both Mastercard and its main competitor, Visa, to determine if Visa's current price is more reasonable.
In the world of finance and investing, it's important to conduct thorough analysis before making decisions, as the pricing of both Mastercard and Visa stocks may influence the potential return on investment for investors seeking to diversify their portfolios by investing in payment processing companies.
