Visa (NYSE: V) and Mastercard (NYSE: MA) stock prices outperformed the market in 2022 as they slipped by about 5%. The Dow Jones and S&P 500 indices slumped by double-digits as investors reacted to rising recession and inflation risks. Here are three reasons to invest in Visa and Mastercard in 2023.
Visa and Mastercard are the two biggest payment processors in the world. They are important brands that have a strong moat in their industry. Their biggest competitors, Discover and American Express have a relatively small market share in the industry globally.
Further, these companies have some of the widest margins in the world. Visa has a net income margin of 51% while Mastercard has 45%. Their EBITDA margins are 70% and 60%, respectively. This means that these firms are able to generate substantial profits even as inflation remains substantially high.
Visa had over $29 billion in revenue in the trailing twelve months while Mastercard had $21 billion. Their profits were over $14 billion and $9.78 billion, respectively. At the same time, a bill to reign in their hold in the industry stalled in Congress. Even if it passes in 2023, its impact on the two firms will be minimal.
Another reason to buy Visa and Mastercard is how their business model works. The two firms partner with banks and other payment companies that issue their cards. They then make money when people shop online and in stores. Their revenue mostly comes from a small commission that they charge.
Therefore, rising inflation means that the companies take a bigger cut of revenue from their retail partners. This explains why Visa and Mastercard’s business was actually upbeat in 2022 even as retailers struggled.
Visa’s revenue rose from $6.55 billion in Q3 of 2021 to over $7.7 billion in Q3 of 2022. Despite rising costs, its profit rose to over $3.94 billion. Mastercard, on the other hand, saw its revenue rise from $4.9 billion to $5.7 billion while its profit rose to $2.5 billion.
Visa and Mastercard: recession resistant
A likely driver for stocks is the rising risks for a recession as recession risks rise. The yield curve has also inverted to the lowest level in decades. However, in reality, Visa and Mastercard should do well even in a recession. Besides, people are always buying in periods of slow economic growth. Indeed, Mastercard and Visa have done better than the market in all recent recessions.
Further, their valuations are cheap in a historical perspective. Visa has a forward PE of 24.84 while Mastercard has a multiple of 32. While expensive, these numbers are substantially lower than their historical averages. Here are more recession-proof stocks to consider.
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