Neil Patel, The Motley Fool
·4 min read
Among the dozens of holdings in Berkshire Hathaway's massive $365 billion stock portfolio, Visa and Mastercard are tiny positions. Combined, they make up less than 1% of the conglomerate's total assets.
But that doesn't mean the payment technology companies have been poor performers. It has been quite the opposite situation, actually. The two financial stocks have soared over the last decade, crushing the S&P 500 index's gain by wide margins.
There's no question that Visa and Mastercard have both been phenomenal for their shareholders. But is there a better Warren Buffett stock that investors should consider buying right now?
Wonderful businesses
There is no shortage of compelling reasons to appreciate the two credit card payment giants. For starters, both Visa and Mastercard have historically posted a steady revenue and earnings growth. Even in uncertain macroeconomic times, like what the world has been in for the past few years, these businesses continue to report impressive financial results.
They are both incredibly profitable. During the last three months of 2023, Visa and Mastercard's operating margins came in at 69% and 52%, respectively. Such bottom-line strength allows them to pay dividends and buy back lots of stock.
I'd also point to their wide economic moats. Thanks to their enormous two-sided payments platforms that merchants and consumers have heavily adopted globally, both companies benefit from powerful network effects. Consequently, their competitive positions are virtually unassailable.
It's no wonder they both have made for fantastic investments.
A top financial stock
It would be hard for anyone to question the idea that Visa and Mastercard are truly great companies. But some investors might balk at their above-average valuations. At the moment, shares of Visa and Mastercard trade at nearly 29 and 33 times forward earnings, respectively.
Meanwhile, take a peek at Berkshire Hathaway's portfolio, and you'll notice that another large payments enterprise is a top holding: American Express (NYSE: AXP). And it should be on your radar.
Like Visa and Mastercard, Amex also operates a two-sided payments platform. This means that it, too, benefits from network effects. There are 80 million merchant locations in 200 countries that accept Amex as a method of payment. And as of Dec. 31, it had 141 million active cards in circulation that helped drive $434 billion of transaction volume in the last three months of 2023.
But unlike Visa and Mastercard, American Express is also a card issuer. It finds and underwrites borrowers, takes on credit risk, handles ongoing payments, and offers perks and rewards to cardholders.
So, not only does Amex earn significant amounts of interest income, which represented 22% of total revenue (net of interest expense) in 2023, but the business collects what's called discount revenue directly from merchants who plug into its network. Amex makes more money from every transaction that runs across its system.
Because American Express typically targets a higher-income consumer, its default rates are lowerthan those of its banking peers. This points to the status of its well-known brand, and helps reduce its financial risk.
In Q4, the company reported revenue growth (net of interest expense) of 11% and diluted earnings per share growth of 27%. Management expects double-digit percentage gains again this year.
As of this writing, its shares trade at a forward price-to-earnings ratio of 17.3. That's a much cheaper valuation than Visa and Mastercard. But it's justified because Amex operates more like a traditional bank.
Given the substantial stake Berkshire Hathaway holds in American Express (about 21%), Buffett and his investment team clearly view it as the best stock to own of these three. But I don't see any problem with buying and holding all of them. They could all be long-term winners.
Should you invest $1,000 in American Express right now?
Before you buy stock in American Express, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the10 best stocks for investors to buy now… and American Express wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service hasmore than tripledthe return of S&P 500 since 2002*.
*Stock Advisor returns as of March 18, 2024
American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
Visa and Mastercard Are Phenomenal, but Is This a Better Warren Buffett Stock to Buy Right Now? was originally published by The Motley Fool
