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Morgan Stanley (MS) last month suggested that it expects Visa (V) and Mastercard (MA) to benefit from AI. However, a prominent research firm recently warned that credit card networks could start to be replaced by stablecoins. Moreover, the valuations of V and MA are not especially low, while their technical outlooks are poor.
About Visa and Mastercard
Based in San Francisco and Purchase, NY, respectively, Visa and Mastercard operate networks that help to process credit card transactions globally. Visa's market capitalization is $581.8 billion, while Mastercard's market capitalization is $464.6 billion. MA's forward price-earnings ratio is 26.68 times, while V weighs in with a forward P/E ratio of 24.93 times.
In Visa's first quarter that ended in December, its revenue climbed 15% versus the same period a year earlier to $10.9 billion, while its net income, excluding certain items, advanced 12% year-over-year (YOY) to $6.1 billion. As for Mastercard, in Q4 its revenue climbed 18% YOY to $8.8 billion, while its bottom line rose 17% YOY, excluding currency fluctuations, to $4.1 billion.
The AI-Related Initiatives of MA and V
Morgan Stanley indicated that Mastercard and Visa could benefit from the increased use of AI due to the higher value of their “tokenization and consent-based authentication” offerings.
According to a Capital One (COF) white paper, “Tokenization replaces sensitive data, like personally identifiable information (PII), with anonymized tokens that provide no value to bad actors.” Capital One also referred to “zero trust strategies that require continuous authentication and authorization.”
Mastercard and Visa both say they offer tokenization. Last September, Visa reported that it was “testing (software systems) that enable tokenized payments and consent-based authentication for agent transactions," while Mastercard provides an ”Authentication Consent service….. to efficiently manage the lifecycle of consumer consent."
Since AI can and already has been hacked, it's very possible that, in accordance with Morgan Stanley's theory, the proliferation of AI agents will significantly increase the demand for the tokens and authentication products provided by Visa and Mastercard. And the revenue provided by these offerings could eventually meaningfully improve the financial results of the two firms.
Notably, Mastercard, along with Banco Santander (SAN), recently executed what they called the first payment in Europe using an AI agent, while Visa was ranked by a third party as the top exploiter of AI among payments companies.
An AI-Related Threat to the Outlooks of MA and V
According to research firm Citrini, by next year, AI agents will be widely utilizing stablecoins instead of credit cards. Calling credit card fees “an obvious target” for AI agents programmed to seek lower costs, Citrini reported that stablecoins charge less than $0.01 for each transaction, versus the 2%-3% fees levied by cards.
Valuations Aren't Especially Attractive and the Technical Setups Are Poor
Analysts' average estimates call for the earnings per share of MA and V to advance 14% and 12%, respectively this year. Based on those growth rates, the companies' P/E ratios are not particularly compelling now.
