An earlier version of this story misstated Mizuho analyst Thomas McCrohan’s Mastercard price target. It is $220, not $200.
Visa Inc. and Mastercard Inc. process more than $15 trillion in payments annually, but they both want to do more.
The card networks are increasingly planning for a future beyond card payments, argues 451 Research analyst Jordan McKee, as they branch into ancillary services that make use of the troves of transaction data they have on hand and leverage their relationships with industry players.
“There’s a realization across the whole value chain that scraping off a few cents or basis points is a model that’s going to see pressure,” McKee told MarketWatch. Payments, he said, are a sort of commodity, and Visa and Mastercard see opportunities to serve businesses in new, related ways.
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The two companies may share more information about these business areas when they report second-quarter earnings results. Visa V, +0.86% is due to report Wednesday after the bell, while Mastercard MA, +1.99% will deliver results Thursday before the market opens.
Visa, for example, has services that help with ad targeting, customer acquisition and loyalty programs. The company’s advertising-solutions business allows merchants to see whether their campaigns have been paying off in terms of customer spend, and its commerce business provides discounts to Visa customers who make certain purchases shortly after completing an Uber ride. Earlier in July, Visa introduced a loyalty solutions business aimed at Latin America and the Caribbean.
The company is trying to get closer to merchants and improve those relationships, McKee argued. Banks are otherwise the card networks’ main customers.
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Like Visa, Mastercard has advertising and other products aimed at retailers, including tools that examine purchase data to help merchants choose a location for their next store. Artificial intelligence has become a recent focus for the company, which last year acquired Brighterion, a fraud-prevention service that makes use of AI.
Mastercard’s various services efforts could help it pick up new business from more than just merchants.
“We believe Mastercard’s services portfolio…somewhat helps to win share amongst small issuers and local co-brand partners,” Bernstein analyst Harshita Rawat wrote shortly after initiating coverage of Mastercard this spring. She now rates the stock at outperform with a $225 price target.
Both companies are pushing to capture more business-to-business payments, and Mastercard is hoping to leverage data in its efforts. James Anderson, who heads Mastercard’s commercial payments business, said companies tend to have many invoices from a given supplier, meaning that it’s not always easy for that supplier to figure out which ones a particular payment covers once a check comes in.
“We think there’s an opportunity to improve that by adding data,” he told MarketWatch last month. Vocalink, a company that Mastercard acquired back in 2017, helps do that.
As the card giants look for ways to stay on top of the latest technology, they’ve also been making investments in fintech up-and-comers. Visa, for example, has invested in Klarna, a Swedish company that lets users choose to pay only after trying out a product or split a purchase into installments. Visa has also invested in Square Inc. SQ, +3.82% and Stripe.
“Insight into the next generation of competitive services and an opportunity to outright acquire the underlying technology ahead of their competitors can be an invaluable advantage in an increasingly competitive landscape,” said Josh Buhler, a partner at Buhler, Duggal & Henry LLP. Big companies will often ask for right of first refusal in case companies they’ve invested in receive acquisition offers from others.
What to expectEarnings: Analysts tracked by FactSet expect Visa to earn $1.09 per share in adjusted earnings for the quarter, up from 81 cents a year earlier. According to Estimize, which crowd sources projections from hedge funds, academics and others, the average estimate calls for $1.12 in EPS.
As for Mastercard, the FactSet EPS consensus calls for $1.53, while the Estimize consensus is for $1.59. The company posted per-share earnings of $1.10 a year ago.
Revenue: Analysts surveyed by FactSet expect that Visa will report revenue of $5.1 billion for the June quarter, up from $4.6 billion in the year-ago period, while the Estimize consensus calls for $5.2 billion.
Both the FactSet and Estimize consensus figures for Mastercard project $3.7 billion in quarterly revenue. The company recorded $3.1 billion a year ago.
Stock movement: Visa shares have gained following seven of the company’s last 10 earnings reports, while Mastercard’s stock has risen after six of 10. Visa’s stock is up 40% over the past 12 months, compared with a 61% rise for Mastercard shares and a 14% gain for the S&P 500 index SPX, +0.21% .
“The key controversy in the quarter will be whether Visa narrows the performance gap versus Mastercard,” Bernstein’s Rawat wrote recently. Mastercard shares are trading near their “all-time high” premium relative to Visa, she said.
Analysts in general view the card networks positively. Of the 37 analysts tracked by FactSet who cover Visa, 33 rate it a buy, three label it a hold, and one has a sell rating. For Mastercard, 34 analysts have buy ratings and the other five have hold ratings, per FactSet.
The average Visa price target is $150.79, 8% above current levels. The average Mastercard target of $215.07 is 4.3% above where the stock recently traded.
What else to watch forVisa and Mastercard are reportedly planning to settle a long-running merchant suit, The Wall Street Journal said last month. During the second quarter, the companies both put aside money for impending settlements, though they did so in much different ways. Investors should be aware of the differences when they look at the coming numbers.
While Mastercard put aside about $210 million last month in a fairly standard way, Visa took a more unorthodox approach. The company has had special bank-owned Class B shares since before its IPO a decade ago, and they’re set up such that when Visa deposits money into its litigation escrow fund, as it did with $600 million during the June quarter, the deposit functions like a buyback of class A common stock. This structure stems from Visa’s history as a bank-owned cooperative before going public.
Thus, Visa’s and Mastercard’s GAAP net income will reflect the funding that took place during the quarter, but only Mastercard will see an impact to its GAAP earnings per share. The EPS impact for Visa is eliminated because of the share conversion that takes place upon funding the litigation.
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As relates to Visa, investors will also be looking for commentary around price increases in Europe. Visa acquired its European counterpart two years back and is in the process of getting Visa Europe in line with the rest of the company. Price increases are a “key synergy driver” for the Visa Europe transaction, Rawat wrote, and a smooth integration of Visa Europe is part of the bull case for Visa shares.
Mizuho analyst Thomas McCrohan will be looking for further commentary on cross-border transactions, which he sees as driving results for both Visa and Mastercard. Though cross-border transactions make up a small sliver of overall volume, they account for a much larger portion of net revenue owing to their greater fees.
Mastercard last quarter said that cross-border volume fees accounted for less than a third of net revenue, but McCrohan estimates that cross-border transactions actually make up more than 40% of net revenue since some of their other fees are captured in different line items on Mastercard’s financial statements.
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“Higher-yielding cross-border volumes are becoming an increasing part of the overall mix for both card networks, and we view this secular mix shift as a very important part of the overall investment thesis for both Visa and Mastercard, which is not fully appreciated, in our view,” he wrote recently.
Visa and Mastercard may share more about their cross-border revenue on their respective earnings calls.
Mizuho’s McCrohan also saw “generally positive” read-throughs from the latest bank earnings. He has a $220 price target on Mastercard’s stock and a $152 price target on Visa’s stock, both of which he rates at buy.
