According to Federal Reserve data, total credit card balances rose by $50 billion in 4Q23, and finished the year at $1.13 trillion. It marked a record high for consumer credit card debt, and brings with it both positives and negatives. On the negative side, it’s record-level consumer debt at a time of elevated interest rates, while on the positive side, it can be taken as an indicator of strong consumer spending.
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On the investment side, this opens up a range of opportunities, one of them being in the major credit card companies, Visa and Mastercard.
It’s an opportunity which TD Cowen analyst Bryan Bergin describes it as ‘durable,’ recommending that investors buy in without overthinking it: “Ongoing digitization of consumer payments supports secular growth foundations, while staged growth frontiers via VAS (value-added services) & New Flows drive upside for sustainable double-digit growth. Emerging payment method threats and policy / regulatory risks persist but are manageable over the near to medium term. Interoperability supports offensive & defensive strategies.”
Getting to specifics, Bergin has initiated coverage of both of these stocks with Buy ratings, in-line with their Strong Buy consensus ratings, according to the TipRanks database. Let’s take a closer look at what makes them so.
Visa (V)
We’ll start with Visa, the world’s largest credit card issuer. The company can boast of a market cap of $545 billion – and as per its 2023 annual report, there were 4.3 billion Visa-issued cards circulating globally. The company has partnerships with over 14,500 financial institutions, and its cards are accepted at over 130 million merchant locations across the globe. Visa, which acts as a card issuer and payment processor, handled over 283 billion card transactions in 2023.
Visa is a durable company, with a long and proven history of delivering sound financial results for its investors, although the shares have trailed the broader markets over the past year.
The plus side, of course, is that V shares provide consistent, long-term gains. These are supported by the company’s solid business model – and by the steady upward trend in both revenues and earnings. In the last reported quarter, for fiscal 1Q24, Visa showed a top line of $8.6 billion, up almost 9% year-over-year and $50 million ahead of the forecast. Visa’s bottom line, reported as a non-GAAP net income of $4.9 billion, translated to an EPS of $2.41, 7 cents per share ahead of the estimates. Visa’s business is a strong cash generator, and the company finished 2023 with over $13.5 billion in available liquid assets.
For Bergin, in his coverage of this consumer credit stalwart, the key lies in its consistency, its margins, and its long-term addressable market. He writes, “Visa is a durable, high-margin business that has built among the largest payments networks within a $45Tn consumer spend market that we believe is underpenetrated by digital payments. Visa is increasingly exposed to New Flows out of traditional C2B payments that expands its addressable opportunity. We see a sustained net revenue growth rate in the HSD-LDDs, and attractive profitability and FCF generation that support LDD to low-teens EPS expansion.”
These comments back up Bergin’s Buy rating on V, and his $320 price target points toward an 18% one-year upside potential. (To watch Bergin’s track record, click here)
The overall view of Visa is also upbeat. The stock has a Strong Buy consensus rating, based on 26 recent reviews that break down 23 to 3 favoring Buy over Hold. With an average price target of $308.67 and a current trading price of $271.28, the stock has potential upside of 14% on the one-year horizon. (See Visa stock forecast)
Mastercard (MA)
Next up is Mastercard, one of Visa’s peer companies in the credit card issuer and payment processing space. The company has a $429 billion market cap, and there are approximately 309 million Mastercard-branded cards in circulation in the US, about one quarter of the global total. It is obviously a massive business, and in 4Q23, the company showed a gross dollar volume of $2.4 trillion, up 10% year-over-year. For the full-year 2023, the company’s gross dollar volume hit $9 trillion.
Where Visa’s stock has underperformed slightly compared to the S&P 500 in the past year, Mastercard has slightly overperformed, the stock’s 24% 12-month increase is running faster than the index’s 22% gain over the same period. Along with these share gains, Mastercard also shows a general long-term trend of increasing revenues and earnings.
In the firm’s last quarter, 4Q23, Mastercard reported total top-line revenue of $6.5 billion, a figure that was up 13% from the prior year period and $20 million better than anticipated. Mastercard’s non-GAAP EPS, derived from adjusted net income of $3 billion, came in at $3.18 per share, 10 cents higher than the forecast.
This is another stock whose prospects for continued long-term growth have attracted Bryan Bergin. The Cowen analyst says of the payment processor/card issuer, “Mastercard is a high growth, high margin, durable business that is poised to continue delivering outsized growth over the medium to long term given attractive market positioning within a ~$45Tn global consumer payments market that is not fully penetrated by digital payments. Consumer payments demonstrate long term, stable growth, and we think should offer a MSD-HSD base of growth. Mastercard should outgrow this floor as it capitalizes on the benefits of cash conversion, increased acceptance locations of carded payments and growth in credentials…”
Bergin goes on to give MA a Buy rating, and he complements that rating with a $545 price target that suggests an upside of 18.5% over the next year.
The Cowen analyst’s peers on the Street are also optimistic about Mastercard, as demonstrated by the Strong Buy consensus rating, supported by a lopsided 28 Buys to 1 Hold. This stock is currently trading for $459.79 and its average target price, $515, implies a 12-month upside of 12%. (See Mastercard stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
