In this piece, I evaluated two financial services stocks, Visa Inc. (V) and LendingTree, Inc. (TREE), to determine which has better return potential. Based on a fundamental comparison of these stocks, I find V a better pick for the reasons explained throughout this article.

Financial service providers play a vital role in the economy. Banking, investment, insurance, and asset management are some financial services. The pandemic has accelerated the adoption of digital financial services. Digital financial solutions have completely changed how we save money, transact, avail credit, etc. Moreover, given the proliferation of the Internet, financial services are now available to a broader population.

Financial companies benefit from rising interest rates. Despite easing inflation, Federal Reserve officials have forecast two more rate hikes by the end of this year. Rising interest rates usually bode well for financial companies as it helps them increase their revenues.

The financial services market is expected to grow at a CAGR of 7.4% to $33.31 trillion by 2026. Post 2026, the market is expected to grow at a CAGR of 6.3% to reach $45.15 trillion by 2031.

V has surpassed the analyst estimates in the second quarter. Its EPS came 5.2% above the consensus estimate, while its revenue topped analyst estimates by 2.5%. On the other hand, TREE’s revenue came 3.2% below the consensus estimate in the first quarter.

V’s CEO Ryan Mclnerney said, “Visa’s strong fiscal second quarter performance reflects continued focus on our growth levers – consumer payments, new flows, and value-added services.”

TREE’s Chairman and CEO Doug Lebda said, “During the first quarter, we completed a strategic expense reduction that impacted 13% of our workforce. The plan targeted parts of our business that are more capital intensive, as well as those areas where the revenue outlook has become less certain in light of the challenging economic environment.”

TREE’s CFO Trent Ziegler said, “The series of steps we have taken to right-size our fixed costs over the last two quarters will allow us to generate improved operating leverage as demand from our partners eventually recovers. In the interim, running the business more efficiently will help improve our immediate financial performance and streamline our ability to execute on our targeted growth opportunities.”

V's payments volume in the second quarter increased 10% year-over-year, while its cross-border volume total rose 24% over the prior-year quarter. In addition, its processed transactions increased 12% year-over-year. V expects its international growth trajectory for the third quarter to remain unchanged from the second quarter.

The cross-border travel recovery trend has been steady and in line with expectations in fiscal 2023. Excluding intra-Europe, the cross-border travel index will keep improving at 5 to 6 points every quarter. Moreover, the recovery of Chinese travel will boost Asia’s travel demand.

During the second half of the year, client incentives as a percent of gross revenue are likely to be above the higher end of the range of between 26.5% and 27.5%. V expects to finish the year in the upper half of the range. Its third-quarter net revenue growth will likely be in the low-double digits, including the approximately 1-point drag due to the fluctuating exchange rates.

For fiscal 2023, TREE reduced its revenue outlook from $935 million to $985 million to $760 million to $800 million. Its adjusted EBITDA is now expected to come between $80 million and $90 million, compared to the previously forecasted range of $85 million to $95 million.

Its variable marketing margin was also reduced to between $290 million and $310 million, compared to the previously forecasted range of $325 million to $350 million. For the third quarter, TREE expects its revenue to come between $190 million and $200 million, while its variable marketing margin is forecasted to be between $75 million and $80 million. Moreover, its adjusted EBITDA is expected to come between $17 million and $22 million.

When it comes to price performance, V is the clear winner. V’s stock has delivered positive returns in all time frames. In addition, V’s stock has gained 33.7% over the past nine months, compared to TREE’s 7.3% decline.

Here are the reasons I think V could perform better in the near term:

Recent Financial Results

V’s net revenues for the second quarter ended March 31, 2023, increased 11% year-over-year to $7.99 billion. Its non-GAAP net income rose 14% year-over-year to $4.38 billion. The company’s operating income increased 11.1% over the prior-year quarter to $5.34 billion. Its non-GAAP EPS came in at $2.09, representing an increase of 17% year-over-year.

For the fiscal first quarter ended March 31, 2023, TREE’s total revenue declined 29.2% year-over-year to $200.50 million. The company’s adjusted EBITDA decreased 50.7% over the prior-year quarter to $14.50 million. Its adjusted net income fell 47.5% year-over-year to $3.20 million. Also, its adjusted EPS came in at $0.25, representing a decline of 45.7% year-over-year.

Expected Financial Performance

Analysts expect V’s EPS for fiscal 2023 and 2024 to increase 14.5% and 13.6% year-over-year to $8.59 and $9.76. Its revenue for fiscal 2023 is expected to increase 11.1% and 11% year-over-year to $32.56 billion and $36.15 billion. Its EPS and revenue for the quarter ending June 30, 2023, are expected to increase 6.6% and 10.8% year-over-year to $2.11 and $8.06 billion, respectively.

TREE’s EPS for fiscal 2023 and 2024 is expected to increase 125.9% and 22.8% year-over-year to $2.42 and $2.97. Its revenue for fiscal 2023 is expected to decline 21.4% year-over-year to $774.65 million. On the other hand, its revenue for fiscal 2024 is expected to increase 8% year-over-year to $836.42 million.

For the quarter ending June 30, 2023, TREE’s EPS and revenue are expected to decline 6.6% and 26% year-over-year to $0.54 and $193.75 million, respectively.

Profitability

V’s trailing-12-month revenue is 3.4 times what TREE generates. V is more profitable, with an EBITDA margin and net income margin of 69.90% and 50.95%, compared to TREE’s negative 1.35% and 18.14%, respectively. Also, V’s levered FCF margin of 50.59% compares to TREE’s 5.74%.

Valuation

In terms of forward EV/Sales, TREE is currently trading at 1.11x, 92.7% lower than V’s 15.13x. TREE’s trailing-12-month Price/Sales ratio of 0.31x is 98% lower than V’s 15.84x.

Thus, TREE is relatively more affordable.

POWR Ratings

V has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, TREE has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. V has a B grade for Sentiment, in sync with its favorable analyst estimates. TREE’s mixed analyst estimates justify its C grade for Sentiment.

V has a D grade for Value, consistent with its stretched valuation. On the other hand, TREE has a B grade for Value, in sync with the company’s discounted valuation.

V’s 0.97 beta justifies its B grade for Stability. On the other hand, TREE has a D grade for Stability, in sync with its 1.90 beta.

Of the 47 stocks in the Consumer Financial Services industry, V is ranked #3, while TREE is ranked #22 in the same industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, and Quality. Click here to view V’s ratings. Get all the ratings of TREE here.

The Winner

The high-interest rate environment is beneficial for V. Among others, the company should benefit from the rise in travel demand. Also, it is expected to grow strongly due to the transition from cash to digital transactions and the rise in consumer spending.

On the other hand, TREE has taken a few steps over the past two quarters to reduce its expenses, and it expects to generate improved operating leverage in the coming quarters as demand from its partners improves. However, the company lowered its fiscal 2023 outlook for revenue, adjusted EBITDA, and variable marketing margin.

Considering these factors, V could be a better choice than TREE.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Financial Services industry here.

What To Do Next?

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V shares were trading at $236.01 per share on Monday morning, down $1.47 (-0.62%). Year-to-date, V has gained 14.04%, versus a 16.76% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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