Updates on Visa, Mastercard, and ServiceNow

A number of Watch List and portfolio stocks have reported quarterly updates over the last week, with many more to come over the next few weeks. Let's take a quick look at some that have reported.

Mastercard (MA) and Visa (V)

These two companies operate in a virtual duopoly in international credit card processing networks, so it is little surprise to see them both report very similar results for Q1. In number of transactions, both firms reported a 12% increase. In dollar volume of transactions, both firms were up 10% in local currency terms. Cross-border value grew 32% for Visa, 35% for Mastercard. Both firms reported almost identical 11% top-line revenue growth figures.

Frankly, there is usually little to comment on with these two firms. They both have such ridiculously wide economic moats and predictable revenue streams that outside of some unusual challenge (like government regulation or litigation), investors can basically predict results very accurately ahead of time. That's enormously valuable in the investment world!

The difference in the stocks continues to be valuation. While the price-to-sales ratios for these two firms are very similar, Visa has continued to be the more efficient company, delivering free cash margins close to 59% while Mastercard's are meaningfully lower (but still amazing) at 47%. That puts Visa's price-to-free cash flow multiple at 26, substantially cheaper than Mastercard's 34. That still makes Visa the better buy, by a meaningful margin in my opinion.

Given this, I don't think it's really necessary to continue following both stocks. We will just stick with Visa, which is already in the portfolio (currently as a Hold List stock), and drop Mastercard from the Watch List today. Visa's fair value target remains unchanged at $293.

ServiceNow (NOW)

SaaS business process platform ServiceNow reported strong Q1 results, with 24% revenue growth (27% when adjusted for currency), and continued strong profit and cash flow margins. Backlog (which the company calls "current remaining performance obligations", or cRPO) were up 23%, indicating continued strong revenue growth going forward. Transactions over $1 million in net new value increased 27% year over year, and total customers delivering over $1 million a year grew 20%. ServiceNow is demonstrating its ability to win new business with the kind of large, sticky customer base that is so attractive to us.

At the same time, it is also demonstrating its stickiness with existing customers. Gross renewal rate was 98% again this quarter - a stellar figure in the wider SaaS world, where gross retention is usually closer to 90%.

I see little to modify the original thesis on ServiceNow, and continue to view it as a world-class company worthy of investment. With continued good performance and some time value of money effects, the fair value is getting bumped up a few dollars to $564.