Visa and Mastercard: Undervalued Stocks with Attractive Business Models

Visa (V) and Mastercard (MA) have established themselves as leading players in the payment processing industry. Their networks facilitate an enormous volume of credit, debit, and other transactions each year, connecting consumers, businesses, and financial institutions. The scale of their operations allows them to generate substantial revenue by taking a small percentage from the trillions of dollars that flow through their networks.

In essence, payment processing offers an unparalleled opportunity for big business success.

Despite their impressive performance, both Visa and Mastercard stocks are currently undervalued. While they have historically commanded premium valuation multiples, their current prices offer an appealing entry point for investors. Visa stock, for instance, has gained 18% this year but still trades at around 25 times its expected earnings for next year. This is below its five-year average of 30 times and slightly up from 24 times at the beginning of 2023. Comparatively, the S&P 500 trades at 19 times forward earnings multiple today, up from approximately 16 times earlier this year.

Visa’s valuation multiple currently commands a premium of about 30% over the broader market, which is significantly lower than its historical average of around 60%. A similar trend can be observed with Mastercard. Both stocks present a compelling opportunity with valuations that are more favorable than they have been in recent times.

The current valuation of both Visa and Mastercard companies has presented an attractive buying opportunity for investors. Despite their lower valuation compared to the S&P 500, both companies have strong business momentum and are not facing any extraordinary risks or threats of disruption.

Visa, with a sizable profit margin of 55% over the past four quarters, has consistently maintained its level of success while also achieving a 10% annual growth in sales. Additionally, the company boasts a capital-light business model and a significant amount of free cash flow.

On the other hand, Mastercard’s profit margins are slightly narrower, mainly due to its smaller scale. However, both Visa and Mastercard have minimal net debt, further adding to their financial stability.

According to MoffettNathanson analyst Lisa Ellis, the decline in Visa’s and Mastercard’s valuations appears to be primarily technical, offering investors an opportunity to buy stocks at a lower price. Ellis has set price targets of $320 for Visa stock, indicating a potential increase of 32%, and $490 for Mastercard stock, suggesting a potential increase of 23%.

Investors should not solely rely on the valuations returning to their historical premium as the anticipated growth in profits is expected to be more than enough. Analysts forecast that Mastercard’s earnings per share will grow at nearly 18% annually over the next three years, while Visa’s earnings per share are predicted to rise by 14% annually.

Our recommendation to buy Visa stock made last year has proven successful, with a return of approximately 19% since then, outperforming the S&P 500 by close to one percentage point. Given the current lower-than-usual valuation, investing in Visa serves as an attractive starting point and mitigates some near-term risks. It is a promising opportunity for investors.