Visa’s Excellent Brand Outweighs Competition From Discovery and PayPal

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With reports that shipping heavyweights like FedEx will be adding more seasonal workers ahead of the holiday season, players like Visa (NYSE: V) and MasterCard (NYSE: MA) can only wait for what will be a potentially big opportunity to increase their revenue.

Credit card heavyweights are particularly anxious about the second Monday of December, dubbed ‘Green Monday.’ This day, which will be on December 10, usually signals the onset of the heaviest shopping week in the holiday season. While these expectations stir a lot of hope for Visa – a brand with a bigger global footprint when compared with MasterCard – they do not come without risks and limitations.

The Discover Factor

Lately, there has been increased speculation over Discover Financial Services’ (NYSE: DFS) increased popularity. Based on the key valuation metrics like P/E ratio, Discover appears cheaper than its peers. It has a P/E of 9, which represents a much cheaper option when compared to Visa’s P/E of 67.8. In fact, Visa is particularly expensive as there is a notable gap between its P/E and that of American Express and MasterCard, which are 13.14 and 27.99 respectively. This shows the value that the Visa brand name carries; a characteristic that I am particularly keen about.

Valuation metrics aside, Discover shares have managed to gain considerably through the year. They have gained up to 60 percent, eclipsing both Visa and MasterCard which have gained about 35 percent and 25 percent, respectively. In addition to this gain, some analysts are also bullish about Discovery because it has jumped into the promising PayPal bandwagon. The deal that Discovery struck with PayPal earlier in the year is expected to be mutually beneficial to both parties. I personally believe that PayPal will allow Discovery to make significant inroads in the fast growing and highly promising mobile payments front.

Good Short Term Gains, Uncertain Long Haul

The PayPal deal comes as a real boost to Discover. It gives it a huge edge over traditional credit card heavyweights and allows it to tap into the fast emerging mobile payment market that is characterized by online payments and payments via mobile devices like tablets and smartphones.

This holiday season, I believe that Discover will get a chance to witness the potential in the PayPal deal. All the same, will this be a short term affair or will it manage to consistently increase Discover’s top line in the long haul?

My reasoning pushes me to believe that the PayPal deal, however promising, is not aptly suited for the long haul, when considering the current financial market. I am a strong believer in brand names when it comes to stocks that deal with money. Simply put, people have trust issues with money.

I am not saying that PayPal is untrustworthy; I am just stating that its current position provides a leeway for players with better brands like Visa. In reality, the popular payment service has no definitive sense of prudential regulation, no actual formal partnership with retail banks and no FDIC insurance of banks, among other major downsides. This paints a very dim picture for the long haul. Financial regulatory practices continue to tighten up on loose ends and it won’t be surprising if PayPal is directly or indirectly pulled into one of the battles. I believe that Discover’s joyride on PayPal lacks foresight. As such, it doesn’t pass as a serious threat to Visa in the long haul.

Big brands like American Express (NYSE: AXP) have also increased loss reserves in light of low spending among consumers and increased popularity in mobile payments. I believe that this signals a wider trend in the traditional credit card segment. Traditional credit card heavyweights are saving up for emerging technologies.

With more loyal customers and strategies specifically inclined towards future technologies, I believe that traditional credit card players – and in particular Visa – are better plays for the long haul when compared to PayPal. Discover is therefore sailing in the wrong ship.

In the meantime, Visa’s headhunt for a good CEO continues to gain momentum. It is in need of a CEO who can suppress competition from MasterCard, a rival which has gained notable share since the appointment of CEO Banga in 2010. Similarly, Visa will be looking for a CEO who can tactfully address the insecurities posed by PayPal.

muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of FedEx and MasterCard. Motley Fool newsletter services recommend American Express Company, FedEx, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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