Evaluating Buy and Sell Opportunities Post Visa-Mastercard's $30B Deal

Visa Inc. (V) and Mastercard Incorporated (MA) recently made headlines with a settlement estimated at $30 billion, marking a significant development in the U.S. retail and banking sectors. This antitrust settlement, one of the most significant in U.S. history, addresses long-standing disputes over credit and debit card fees stemming from a nationwide litigation that started in 2005.

V and MA have consented to various alterations in the short run as a component of the resolution. They agree that companies could decrease interchange rates - the charge merchants must pay for managing a credit card payment, also called “swipe rates” - by a minimum of 4 basis points (0.04 percent units) for three years. Swipe rates need to be seven basis points less than the average during the next five years.

In addition, it will become easier for merchants to guide customers toward other payment methods, and they can apply extra costs to premium credit cards with higher swipe fees. The settlement is still under the court’s endorsement and won't take effect until late 2024 or 2025.

Anticipated Impact on Merchants and Consumers

Patrick Payne, an assistant professor in personal and family financial planning at the University of Arizona in Tucson, does not expect “dramatic changes” from this agreement but thinks it might make premium cards more costly.

The cards are already costly. For example, the Chase Sapphire Reserve requires an annual fee of $550, but it offers benefits such as access to airport lounge membership and a $300 yearly travel credit. The annual fee for the American Express Platinum Card is almost $700.

Premium cards are more expensive for merchants, too. According to the National Retail Federation, swipe fees typically range around 2% per transaction but can go up as high as 4% for premium rewards cards. If the settlement gets approved, merchants will have the right to charge their customers extra when using premium Visa and Mastercard credit cards.

However, it's not certain whether stores will agree to increase the costs for these customers. Demanding an additional surcharge from specific customers, especially those who pay a lot, might harm relationships and business.

Now, what does it imply for the consumers, the ones who are actually swiping their cards? Probably not a lot, according to experts. “We’ll need to wait and see,” stated Ted Rossman, a senior industry analyst at Bankrate. “My honest assessment is that I don’t think this is a big deal for any party involved,” he said.

Rossman said the settlement’s impact is not much because it lowers swipe fees by less than 1% for a few years and caps the rates for five years. “That’s such a minimal change that I don’t think it’s going to make a big impact,” he remarked.

That said, critics argue that even though this new rule might control market powers, it does not necessarily solve issues related to dominance and setting fees.

Beverly Harzog, the writer of “The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free,” shared that she doesn't think there will be much alteration among credit card issuers following the agreement. This is partly due to alterations not being a “permanent fix.”

She mentioned how three- and five-year spans allow very little time for these firms to implement substantial changes.

Additionally, Rossman adds that the settlement is “a flash point in a larger war,” maybe the most crucial fight yet is about the Credit Card Competition Act. Democratic Senator Dick Durbin from Illinois suggested this law, and it might bring in more competition to this area.

Rossman believes that if Durbin’s bill becomes law, it would significantly affect the financial sector more than the recent settlement. He also mentions how improbable it is for this bill to be approved at the present time. “That's the type of thing that could really change credit cards,” he added.

Bottom Line

Visa and Mastercard are notable players in the consumer financial industry. They are primarily known for their dominance in high-margin businesses, characterized by a consistent increase in revenue and profit fueled by consumer spending. This aspect has garnered significant popularity among investors, as both V and MA stocks have delivered impressive returns over the years.

V and MA have not provided specific details on how the recent settlement could impact their performance in the coming years. Investors may have to wait for their next quarterly reports to gain more insight.

While both companies are financially strong enough to handle the effects of the settlement, the potential savings of $30 billion for merchants over five years translate to a significant annual impact of $3 billion for each firm. This could have substantial implications, potentially resetting revenue levels lower than their current status and leading to slower growth rates.

Besides interchange fees as the primary income source, V and MA earn money from other places, such as small-business solutions. However, most of their revenue still comes from interchange fees.

Despite these potential challenges, the fundamental business model of Visa and Mastercard remains unchanged. However, the settlement’s financial impact underscores the need for investors to closely monitor developments and assess how they could influence the companies’ financial performance and growth trajectory moving forward.

Additionally, regardless of the settlement’s unknowns, V and MA shares still trade at premiums over their peers. For instance, V’s forward non-GAAP P/E of 28.08x is 162% higher than the industry average of 10.54x. Also, its forward EV/Sales and EV/EBITDA multiples of 15.70 and 22.23 compared to respective industry averages of 3.02 and 10.52.

Likewise, MA’s forward non-GAAP P/E of 33.24x is 215.4% higher than the industry average by 10.54x. Additionally, the stock’s forward EV/sales and EV/EBITDA multiples of 16.12 and 26.24 unfavorably compared to the industry averages of 3.02 and 10.52, respectively.

Moreover, both V and MA exhibit notable volatility, with V boasting a 60-month beta of 0.96 and MA standing at 1.08. Considering these factors, investors may benefit from waiting for further clarity on the settlement's repercussions before scooping up shares of V and MA.

PayPal (PYPL) Struggles to Rebound Means Opportunity for 3 Stocks

Leading fintech company PayPal Holdings, Inc. (PYPL) has underperformed the market, with its stock declining more than 30% over the past year. Investor interest in the digital payments company has declined due to rising competition and innovative disruptions brought by its peers.

The pandemic was a good period for fintech companies like PYPL. The fintech companies commanded high valuations as investors’ interest in the sector rose with accelerated digital technology adoption. Fintech companies played a vital role in supporting businesses and consumers during the crisis.

However, the high-interest rate environment and growing competition within the fintech sector have hit PYPL’s fortunes lately. Competition from the likes of tech giant Apple Inc. (AAPL), which has entered the sector with financial services such as the savings account from Goldman Sachs, which offers a 4.15% APY, Buy Now Pay Later Service, contactless payments through Tap to Pay on iPhone, Apple Card, and Apple Pay have affected PYPL’s market share.

Earlier this year, PYPL announced that it would lay off 2,000 people, or 7% of its workforce, to reduce costs and focus its resources on core strategic priorities. Although PYPL surpassed the consensus revenue estimate in the second quarter, it failed to top analysts’ earnings estimates.

Its EPS was 0.3% below the consensus estimate, while its revenue beat analyst estimates by 0.2% in the second quarter. Its net revenues for the second quarter ended June 30, 2023, rose 7% year-over-year to $7.30 billion. Its non-GAAP EPS came in at $1.16, representing an increase of 24% year-over-year. Also, its total payment volume increased 11% year-over-year to $376.50 billion.

However, PYPL ended the second quarter with 431 million users on its platform, declining 2 million sequentially and 4 million year-over-year. This was the second consecutive quarterly decline in its users. The decline in users is alarming as it affects PYPL’s revenue and earnings. For the third quarter, PYPL forecasted its revenues to grow approximately 8% to reach $7.40 billion.

Also, its non-GAAP EPS is expected to grow between 13% and 14% to $1.22 and $1.24. For fiscal 2023, the company expects non-GAAP EPS to grow approximately 20% year-over-year to $4.95.

SVB MoffettNathanson analyst Lisa Ellis downgraded PYPL to ‘market perform.’ Ellis said, “Looking forward, unfortunately, we expect PayPal’s gross profit growth to remain lackluster, in the low-to mid-single digits. We see the potential for further downside to our estimates, particularly given the strong momentum of Apple Pay, which we worry will begin to benefit from the powerful network effects in payments.”

Alex Chriss is expected to take over as the company’s new CEO from September 27. The change in leadership comes during a challenging period for the company. Although the appointment holds promise, whether the new CEO can turn PYPL’s fortunes around has to be seen.

Although the global digital payments and financial services ecosystem remains well-positioned to register strong long-term growth, PYPL faces several headwinds. Amid PYPL’s current challenges, fundamentally stable financial services stocks Visa Inc. (V), Mastercard Incorporated (MA), and American Express Company (AXP) might benefit.

Let’s discuss these stocks in detail.

Visa Inc. (V)

V is a global payments technology company that enables digital payments between customers, merchants, financial institutions, enterprises, strategic partners, and government agencies. It also administers VisaNet, a transaction processing network that allows for the authorization, clearing, and settlement of payment transactions.

On June 28, 2023, V announced that it signed a definitive agreement to acquire Pismo, a cloud-native issuer processing and core banking platform with operations in Latin America, Asia Pacific, and Europe. V’s Chief Product and Strategy Officer Jack Forestell said, “Through the acquisition of Pismo, Visa can better serve our financial institution and fintech clients with more differentiated core banking and issuer solutions they can offer their customers.”

V’s revenue grew at a CAGR of 11.6% over the past three years. Its EBITDA grew at a CAGR of 12.1% over the past three years. In addition, its EPS grew at a CAGR of 14.4% in the same time frame.

V’s 51.94% trailing-12-month net income margin is 101.4% higher than the 25.78% industry average. Likewise, its 67.09% trailing-12-month EBIT margin is 238.7% higher than the 19.81% industry average. Furthermore, the stock’s 51.61% trailing-12-month levered FCF margin is 252.3% higher than the 14.65% industry average.

V’s net revenues for the third quarter ended June 30, 2023, increased 12% year-over-year to $8.12 billion. Its non-GAAP net income rose 7% year-over-year to $4.50 billion. The company’s operating income increased 21.1% over the prior-year quarter to $5.02 billion. Its non-GAAP EPS came in at $2.16, representing an increase of 9.1% year-over-year.

Analysts expect V’s EPS and revenue for the quarter ending September 30, 2023, to increase 16.3% and 9.9% year-over-year to $2.24 and $8.56 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters.

Mastercard Incorporated (MA)

MA is a technology company that provides transaction processing and other payment-related products and services. It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers other payment-related products and services. The company offers integrated products and value-added services for account holders, merchants, financial institutions, and businesses.

On May 26, 2023, MA and UniCredit announced the expansion of their payment partnership. The multi-year partnership will provide the necessary resources to achieve the shared ambition to increase the speed of innovation within the payments space and put customers at the center.

On April 5, 2023, MA announced that it was accelerating efforts to remove first-use PVC plastics from payment cards on its networks by 2028. This move reinforces the company’s sustainable efforts.

MA’s revenue grew at a CAGR of 13.3% over the past three years. Its levered FCF grew at a CAGR of 15.2% over the past three years. In addition, its net income grew at a CAGR of 11.8% in the same time frame.

MA’s 100% trailing-12-month gross profit margin is 67.9% higher than the 59.55% industry average. Likewise, its 57.14% trailing-12-month EBIT margin is 188.5% higher than the 19.81% industry average. Furthermore, the stock’s 0.63x trailing-12-month asset turnover ratio is 198.7% higher than the 0.21x industry average.

For the fiscal second quarter ended June 30, 2023, MA’s net revenue increased 14% year-over-year to $6.27 billion. Its non-GAAP net income rose 9.8% over the prior-year quarter to $2.74 billion. Its non-GAAP operating margin came in at 58.6%, compared to a non-GAAP operating margin of 57.9% in the year-ago quarter. Also, its non-GAAP EPS came in at $2.89, representing an increase of 12.9% year-over-year.

For the quarter ending September 30, 2023, MA’s EPS and revenue are expected to increase 20% and 13.4% year-over-year to $3.22 and $6.53 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters.

American Express Company (AXP)

AXP provides charge and credit payment card products and travel-related services. The company operates through three segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. Its products and services include payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services.

AXP’s revenue grew at a CAGR of 15.7% over the past three years. Its EPS grew at a CAGR of 26.5% over the past three years. In addition, its net income grew at a CAGR of 22.3% in the same time frame.

AXP’s 3.19% trailing-12-month Capex/Sales is 59.3% higher than the 2.01% industry average. Likewise, its 29.34% trailing-12-month Return on Common Equity is 159.7% higher than the 11.30% industry average. Furthermore, the stock’s 0.24x trailing-12-month asset turnover ratio is 12.2% higher than the 0.21x industry average.

AXP’s total revenues net of interest expense for the second quarter ended June 30, 2023, increased 12.4% year-over-year to $15.05 billion. Its net interest income rose 31.6% over the prior-year quarter to $3.11 billion. The company’s net income increased 10.7% year-over-year to $2.17 billion. Also, its EPS came in at $2.89, representing an increase of 12.5% year-over-year.

Street expects AXP’s EPS and revenue for the quarter ending September 30, 2023, to increase 19.7% and 13.6% year-over-year to $2.96 and $15.40 billion, respectively.