Ackman Bets Big on Visa and Mastercard Despite Underperformance
Pershing Square Capital Management's Bill Ackman has made a significant investment in two major financial stocks, Visa and Mastercard. The hedge fund initiated positions in both companies during the three-month period that ended June 30.
The thesis behind this investment is based on the businesses' capital-light model, which avoids taking on credit risk while benefiting from ongoing inflation and powerful network effects that drive profitability and growth potential.
Visa and Mastercard operate as tollbooth business models, earning tiny fees for processing transactions. They boast incredible operating margins of 59% and 60%, respectively, in their latest fiscal quarters, leading to robust free cash flows.
Pershing Square believes there is still significant growth potential, with card-payment volume accounting for half of addressable consumer spending worldwide. Value-added services such as fraud prevention, cybersecurity intelligence, and merchant analytics have become a major growth driver, with revenues rising at 'two to three times' the rate of payments operations.
In contrast, Warren Buffett's Berkshire Hathaway exited its multibillion-dollar positions in Visa and Mastercard during the first quarter. Ackman's firm estimates that these stocks will report 16% and 18% annualized earnings-per-share growth over the next three to five years, respectively.