Mastercard Incorporated (MA) is a payment solution company operating in the credit services industry. The company provides various payment solutions such as credit, debit, mobile, web-based payments, and contactless payments to its account holders, merchants, financial institutions, businesses, governments, and other organizations.
MA has a partnership with Bilt Rewards to launch the Bilt Mastercard and a strategic partnership with Verizon Communications Inc. (VZ) as well. The revenue of the company is affected by cross-border volumes, the number of transactions, gross dollar volume, and pricing changes. I am bullish on Mastercard stock despite its lofty valuation as the continued recovery of the global economy will help the company grow in the next five years.
Increasing Consumer Spending Will Drive Earnings
With the rebound in spending in the recovery phase from the pandemic-induced recession, card-present transactions of the company have seen stellar growth while card-not-present transactions, which mainly include online spending, have continued to maintain their strength due to the increasing popularity of e-commerce. This is a good sign for the company as both these segments are equally important to secure the sustainability of future earnings.
In the fourth quarter of 2021, Mastercard saw gross dollar volumes increase 23% on a local-currency basis, while cross-border volumes rose 53%. Cross-border spending reached above the pre-pandemic levels during the quarter, which was a notable achievement as this marked a full recovery from recession woes.
According to company filings, cross-border travel rebound has been the key driver of revenue for the company, which resulted in an acceleration of consumer spending while opening new doors for the company to sell related services to customers.
To reap the benefits of cross-border travel opportunities, the company is partnering with online travel aggregators that can use the company’s virtual card technologies. One such partnership is the agreement with Travelex in Brazil, which will use Mastercard’s cross-border services to process money transfers to the U.S. and Europe.
Strategic Moves to Secure Growth
Despite seeing slower growth due to pandemic-related restrictions in comparison to other regions, the company views Asia as a market with great opportunities. Many travel destinations in Asia, such as India, Thailand, and Malaysia, continue to be challenged with health risks, and this has prompted health authorities in other regions of the world to advise against traveling to these popular destinations.
Assuming the vaccination rate in Asia will reach similar levels seen in North America and Europe by mid-2022, it would be reasonable to expect an uptick in travel to these nations, which is likely to result in a further acceleration of consumer spending. Bernstein analyst Harshita Rawat believes cross-border travel will accelerate to above-pandemic levels later this year if travel restrictions continue to ease in key regions.
To secure growth from the fast-growing digitalization, Mastercard remains focused on enhancing its digital capabilities. In December, the company announced the acquisition of Dynamic Yield, the state-of-the-art personalization platform and decision engine company owned by McDonald’s Corporation (MCD). This deal will help Mastercard deploy Artificial Intelligence to offer product recommendations and services.
The customer base of Dynamic Yield already includes 400 global brands, and this massive pool of customer data can be used to develop new products with a higher return on investment as well.
Wall Street’s Take
Based on 14 Wall Street analysts offering 12-month price targets, the average Mastercard price target comes to $431.57, which implies upside potential of 13.7%. Mastercard stock comes in as a Strong Buy based on 14 unanimous Buy ratings.
Takeaway
Mastercard revenue declined 9% in 2020, while net income dipped 21% as a result of the virus-induced recession. Along with the recovery of the global economy, consumer spending is normalizing, and Mastercard has made the most of these improving macroeconomic conditions to stage a recovery from pandemic lows. The company seems well-positioned to grow in the next five years as well, which could reflect positively in its stock price.
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