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Mastercard

and

Visa

have been on a tear—and yet their stocks remain cheap. Investors should take the opportunity to scoop up shares.

It’s hard to overstate just how attractive the companies’ business is. Visa (ticker: V) and Mastercard (MA) operate competing networks that process hundreds of billions of credit, debit, and other transactions annually by connecting consumers, businesses, and financial institutions. They each take a percentage off the top of the trillions of dollars of payment volume that travels across their networks. It doesn’t cost them any more to process an additional swipe on a network that already exists—each marginal transaction is nearly all profit.

Put simply, there may be no greater big business out there than payment processing.

The stocks have sought-after attributes for any investor and enjoy premium valuation multiples as a result. Not that premium lately, however. Even after gaining 18% this year, Visa stock fetches around 25 times its expected earnings for the next year, versus its average of 30 times over the past five years and up from 24 times at the start of 2023. Compare that to the

S&P 500’s
19 times forward earnings multiple today, up from closer to 16 times at the beginning of the year.

Visa’s current valuation multiple is a premium of about 30% over the S&P 500, half its historical average of roughly 60%. The picture is similar for Mastercard—it’s cheaper relative to the market and its own history than it has been in a while.

Nothing appears to have changed for either company to warrant a multiple that low compared with the S&P 500. Visa has had a mammoth 55% profit margin over its past four reported quarters—$17 billion in net income on $31 billion of revenue—a level that it can comfortably maintain a level that it can comfortably maintain while also growing sales by 10% annually. It’s a capital-light business: Free cash flow was also $17 billion over the past year. Mastercard’s margins are about 10 percentage points narrower due to its smaller scale. Both companies carry minimal net debt.

The current valuations present buying opportunities for both stocks. “The de-rating in Visa’s and Mastercard’s valuations appears to be largely technical, as business momentum is strong—the networks have both delivered nine straight quarters of positive surprises on revenue and EPS—and they are not facing any new or unusual risks or threats of disruption that would pressure their valuation,” writes MoffettNathanson analyst Lisa Ellis. She has price targets of $320 on Visa stock, up 32%, and $490 on Mastercard, up 23%.

Investors needn’t count on Visa’s or Mastercard’s valuation multiple returning to its historical premium—the anticipated growth in profits will be more than enough. Mastercard’s earnings per share are forecast to grow at nearly 18% annually over the next three years. Visa’s are seen rising 14% annually.

Barron’s recommended buying Visa stock late last year, and it has returned about 19% since then—putting it roughly a percentage point ahead of the S&P 500. We liked it then, and we still like it now. The lower-than-usual valuation makes for another attractive starting point and takes some near-term risk off the table. It’s worth a swipe.

Write to Nicholas Jasinski at [email protected]