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Steven Chen
Steven Chen
Articles (106)  | Author's Website |

What We Learned From the Decade-Long Shareholder Success at MasterCard and Visa

A multi-layer moat with a multi-cylinder growth engine

February 10, 2020 | About:

New York-based MasterCard (NYSE:MA) and California-based Visa (NYSE:V) are the two leading players of the four-company oligopoly of payment processing outside of China. They are also the only two “pure plays” in the space, unlike American Express (NYSE:AXP) and Discover (NYSE:DFS), both of which also issue their own cards to end-users.

Unarguably, both names symbolize quality and growth and, in our view, belong to the scarce species of “wonderful businesses.” As you can see below, MasterCard and Visa consistently generated high free cash return on assets while increasing the top-line year-over-year by between 2% and 21% every year for the last decade.

So what can we learn from both companies’ success in creating tremendous shareholder value? First of all, we observe that these are highly-profitable, scalable, easy-to-understand businesses requiring minimal tangible assets to operate.

The resulting superior returns on capital are so desirable that they would not last long without an impenetrable economic moat. In this regard, neither MasterCard nor Visa relies on one single source to resist competition. As a matter of fact, we could easily recognize a few enduring competitive edges around their business model: e.g., a two-sided network effect connecting consumers and merchants, a well-recognized global brand, economies of scale to invest in technology, product and branding, a single strategic focus on payment processing and a global payment network that is difficult to replicate. In the meantime, the industry is also favorable to investors thanks to its high barrier of entry and oligopoly structure.

As with a multi-layer moat to defend super-normal returns, a multi-cylinder growth engine plays an effective role in driving uninterrupted and value-generative business expansion. MasterCard and Visa can organically grow in a number of ways. For instance, both companies reinvest their earnings to launch adjacent products and services such as person-to-person payment and international remittance, develop new technology like blockchain and expand internationally. In a typical year, both MasterCard and Visa retain around 20% of their annual profits.

Moreover, the “war on cash” is providing a sizable runway, given that cash is still the world’s most frequently used payment method (more than 80% of total transactions in 2017, according to Ajay Banga, CEO of MasterCard). Other tailwinds include the increasing adoption of digital payment and increasing consumer spending globally. Lastly, MasterCard and Visa have also been great pick-and-shovel plays to benefit from the e-commerce war.

One minor concern is that both companies have been buying back shares massively to return capital to owners. However, the valuation has steadily climbed over the last decade and is currently near all-time-high for both stocks (see below), which should legitimately raise some concern about the effectiveness of value creation for shareholders moving forward.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of MasterCard.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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