Both Visa Inc (NYSE:V) and MasterCard Inc (NYSE:MA) are aggressively pursuing new opportunities to try to get their shares moving. Visa stock is up only 4% in 2016. This comes despite a strong third quarter and equally strong guidance for the full fiscal year. Similarly, MasterCard stock has had a rough year, with shares down 1% in 2016. So which company has the long-term advantage?
Visa stock has a huge catalyst in a new deal with Paypal Holdings Inc (NASDAQ:PYPL); meanwhile, MasterCard stock is set for a lift with new plans to gain entry into China.
Here is an in-depth look at both companies and which stock you should be buying.
Visa Stock: New Paypal Deal
Visa recently announced a new partnership with Paypal, a former rival. The two companies fought for more than decade and Paypal even tried to take customers away from Visa by offering its own services to Paypal customers.
However, under the new partnership, Paypal will encourage customers to use Visa and boost its spending volume. Paypal will gain entry to additional physical stores, a move that could boost both Paypal and Visa stock.
Paypal was encouraging Automated Clearing House transactions using customers’ banks instead of debit and credit card transactions from Visa cards.
ACH transactions make only 10 to 50 cents each. Compare that to debit and credit card transactions, which bring in 1% and 2%, respectively, of the final sale price … that was a lot of money that Visa was missing out on and could be a nice bonus going forward for the company’s financials.
Paypal has more than 188 million active customer accounts. In the most recent quarter, the company handled 1.4 billion transactions, an increase of 25%. Visa will help Paypal expand its reach into physical stores. Paypal users will be able to use their account everywhere that Visa contactless payment is supported. This adds millions of additional stores to Paypal’s growing retail point of sale number.
MasterCard Stock: A Better Growth Plan?
MasterCard, which is the smaller of the two main U.S. credit card companies, may have the better growth plan. MasterCard is in talks of applying for a license in China this year, which could quickly accelerate analyst estimates for the next year and boost MasterCard stock along the way.
In 2012, the World Trade Organization ruled that China needed to open up its credit card market to competitors. The company’s state run Union Pay dominates the 55 trillion Yuan market (about $8.3 trillion USD). China has more than 5.4 billion cards in circulation. In 2015, 48% of gross consumption and retail transactions took place with cards. China’s card market is expected to become the world’s largest by 2020. Obviously, this is a huge market for both MasterCard and Visa.
MasterCard appears to be ahead of the game, with Reuters reporting recently that MA is soon applying for its license. While the Chinese market is open, companies must meet national and cyber security standards and also hold additional capital in local companies. MasterCard is working on meeting these standards and also deciding if it wants to adopt a local partner or go in alone to China.
While MA recently hit the news for its plans in China, don’t think that Visa is sitting idly by. Visa announced earlier this year that it signed a memorandum of understanding with Union Pay. This could lead to a collaboration in the future that would put Visa in partnership with China’s leader. With MasterCard likely entering the game alone, China could become a key battleground that would once again pit Visa vs. MasterCard in a fight for customers and transaction revenue.
Visa reported strong third-quarter earnings in July. Overall revenue grew 3% to $3.6 billion. This came from large increases in transactions (up 12%) and data processing revenue (up 10%). The company sees full-year revenue growing in a range of 7% to 8%. Earnings per share are expected to increase at a low double-digit percentage rate.
The real kicker that should get Visa stock moving is the company’s aggressive share buybacks. Visa bought 21.7 million shares for $1.7 billion in the third quarter, at an average share price of $77.53. The company announced a new $5 billion share buyback during the earnings report. With $12.4 billion in cash and strong cash flow, V stock has room to run with these aggressive shareholder friendly measures.
MasterCard reported a huge second quarter with revenue up 13% to $2.7 billion. The company saw purchase volume increase 9% and cross border volume rise 10%. MasterCard is also using cash to buy back shares.
MasterCard bought 5 million shares for $462 million and has $2.7 billion remaining on its current share buyback plan.
Bottom Line on MA and V Stock
Visa stock is up 17% in 2015, but in 2016, shares have stumbled and it is up only 4%. Visa stock is trading close to a 52 week high and deserves that spot, as the company looks financially secure and is seeing strong growth. Share buybacks should continue to boost Visa stock along the way.
On the other hand, MasterCard stock was up 19% in 2015, but is down 1.5% in 2016. MasterCard has the lower market capitalization of the two credit card companies at $106 billion (vs. $188 billion). So to figure out whom the better company is for the short- or long-term, China could be a leading factor.
I think the partnership with Union Pay could be huge for Visa stock, giving it access to a massive existing base of cardholders in China. But, right now, I my tip my hat to MasterCard stock, as the company is more vocal in wanting to get into China as quickly as possible, a move that cannot be ignored by investors.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.