Visa (NYSE:V) and Mastercard (NYSE:MA), the world’s largest payment networks, have done a great job for their investors. Both stocks have hugely outperformed the benchmark indexes this year, riding successfully through the extreme volatility.
If you compare their performances over the past five years, the gains have been stunning. Shares of both companies have surged more than 150% during that period, compared with a 50% gain in the S&P 500 Index.
Visa (V) – 10-Year Chart
The growth stories of Visa and Mastercard were very impressive. Thanks to their market dominance and the continuing worldwide shift away from cash, both companies were well positioned to benefit from strong global economy, solid consumer spending in the US and a favorable credit environment.
Mastercard (MA) – 10-Year Chart
Visa ended its fiscal year with record profit and revenue, posting double-digit increases in both the number of transactions and payments processed. Mastercard, in the latest quarter, reported a 33% jump in profit from the year-ago period, beating analysts’ expectations by a healthy margin.
But the next leg of their journey doesn’t look that straightforward.
With growing signs of economic weakness outside the US, coupled with an escalating trade war with China, the macro environment won’t be as conducive as it has been in 2018 for these giants.
The Stocks Will Take A Breather As Macro Environment Weakens
That uncertain outlook is already making investors nervous, with share prices underperforming in the recent market slump. Visa, for example, has fallen about 8% since its October intraday peak. Mastercard, which is more exposed to Europe, has gone through a correction, falling more than 12% since its October high.
In our view, both stocks will continue to underperform the market if macro headwinds gather pace and consumer spending takes a hit. Keeping these risks in mind, it’s a prudent strategy for investors to book profit and move to the sidelines.
In addition to these macro uncertainties, both stocks also look expensive after the massive rally of the past five years. Visa and Mastercard are trading around 35x their 12-month trailing earnings, much higher than the 10-year average multiple for both companies.
That said, both companies are great stocks for long-term investors who are looking for the right moment to enter the trade. Visa and Mastercard have about 90% of the global card network market share. They collect fees on every transaction that runs over their networks. That economic moat is unlikely to go away anytime soon, despite efforts by startups to grab some market share.
When it comes to rewarding investors, Mastercard and Visa have been quite attractive. Both companies pay regular dividends and have share buyback plans. Visa hiked its dividend last month by 19% to $0.25 a share.
We like both Visa and Mastercard for long-term investments, but their current valuations look pricey after their shares returned impressive gains in the current bull run. In our view, the timing is right to book profit and move to the sidelines and come back when their share values become more reasonable and in line with their historic earnings multiples.