Since going public, Visa (NYSE:V) and Mastercard (NYSE:MA) shares have performed incredibly well. Visa shares are up more than 250 percent since going public in March 2008, and Mastercard shares have skyrocketed 1,600 percent since going public in 2006. Despite these strong performances, I think there is a lot more upside in both of these stocks for long-term investors.
This is due to a very strong global secular trend favoring cashless transactions in lieu of cash transactions.
Over the past several years, there has been an increase in the portion of global transactions that have taken place using debit and credit cards. This trend is evidenced in a comparison of the cashless payment industry’s sales growth relative to the global economy. Visa and MasterCard, which represent a majority of credit card and debit card transactions, are growing their combined sales at a much faster rate than the rate at which the global economy is growing. Over the past decade, while global gross domestic product has increased from roughly $37.6 trillion to $70 trillion, or at a 6.4 percent annual growth rate, Visa and MasterCard’s combined revenue has grown from $4.2 billion to over $20 billion, or a 16 percent annual growth rate.
There are three reasons that we have seen this trend, and there is reason to believe this trend will continue for years to come.
First, we have seen a rise in the number of Internet and mobile transactions, all of which take place using credit cards and debit cards. Despite the rapid growth in this industry, as evidenced in the rapid sales growth we see coming from Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), such transactions still represent a rather small percentage of the global economy — just more than 2 percent. As Internet and mobile transactions continue to increase, so will the usage of credit cards and debit cards to facilitate these transactions.
Second, credit cards and debit cards are convenient compared to cash. Cash can be burdensome to carry and to transact in, especially when dealing with small exact amounts or very large amounts. Furthermore, if cash is stolen, it is almost impossible to trace. If a credit card is stolen, then the credit card company knows exactly when the card was used and where. Often the card owner can be reimbursed for such illegitimate transactions if (s)he reports the card stolen.
Third, governments love the fact that credit card and debit card transactions are easily traceable, as it allows them to trace the flow of money. While governments have been against Visa and Mastercard for their seemingly cartel-esque activities, they have clearly favored the use of credit card and debit card transactions to cash transactions. We see this in restrictions on using cash for large transactions. Such restrictions are becoming more egregious globally, but particularly in Europe. For example, in France, transactions greater than 1,000 euros are illegal. Similar laws exist in Spain and Italy.
Given these trends, I think investors should consider taking positions in the two companies that are best positioned to profit — Mastercard and Visa. Other companies, such as American Express (NYSE:AXP) and Discover Financial (NYSE:DFS), are set to benefit, as well. However, investors in these companies must bear in mind that they get a great deal of their business from lending money to their credit card customers. While this isn’t necessarily a bad business, it is a different business that will succeed based on different premises than those given above.
Given the strong performance of shares of Visa and Mastercard lately, investors might want to wait for weakness. Visa has strong technical support around $213 per share, and Mastercard has support at around $72 per share.
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