tiprankstipranks
Mastercard Stock: Exciting Momentum, but Evolving Risks
Stock Analysis & Ideas

Mastercard Stock: Exciting Momentum, but Evolving Risks

Mastercard Inc. (MA) needs no introduction. With society gradually advancing towards a cashless future, modern wallets often hold more than a couple of Mastercards and Visas. Visa (V) and Mastercard have basically formed a duopoly in the international payment processing industry.

Mastercard, in particular, is optimally set to benefit from the continued tailwinds attached to the shift towards a cashless society. Amid ever-growing e-commerce sales, strong pricing power regarding fees, and a deep industry moat, the company enjoys a practically unparalleled competitive advantage.

The payment network processing industry is extremely difficult to penetrate. The myriad of fintech companies emerging rapidly still utilize Mastercard’s (or Visa’s) networks in card-related transactions. Thus, don’t confuse the rise of fintech firms with growing competition.

With a strong recovery in its Fiscal 2021 results, compared to the adversely impacted transaction volumes due to COVID-19 in the previous year, Mastercard is currently enjoying exciting growth momentum.

However, with concerns over consumer spending rising lately and interest rates on the rise, the stock may be trading at a rather steep multiple. Accordingly, I am neutral on the stock.

Mastercard: Set for Record Profits in 2022

Mastercard’s Q4 results demonstrated further improvement from last year’s earnings, which had been affected by the pandemic. Global gross dollar and purchase volumes grew 23% and 27%, respectively, versus the comparable period last year. Specifically, U.S. purchase volume came in 25.7% higher than the previous year, while Europe and Latin America also displayed explosive growth in that regard, growing 39.2% and 39.1%, respectively.

Amid strong purchase volume recovery, Mastercard’s margins and profits have not just normalized but have, in fact, surpassed the company’s pre-pandemic levels.

Note that Mastercard’s cash flows resemble royalties because the company’s gross margin is literally 100%. With Mastercard’s revenues growing, supported by rising consumer spending, it takes on little to no additional operating expenses, effectively “perpetually” expanding its net income potential.

In Q4, adjusted EPS came in at $2.35, 43% higher year-over-year and notably more elevated than Mastercard’s pre-COVID-19 levels. Amid excellent economies of scale, the operating margin grew to a jaw-dropping 54.2% compared to 49.9% in Q4 2020. Few, if any, companies on the globe can consistently attain such spectacular margins, which illustrates the company’s overall moat and superior business model.

In addition, it’s noteworthy that cross-border volume fees grew 53% on a constant-currency basis, which implies accelerating travel and tourism activity. Combined with the overall momentum the company is currently enjoying in consumer spending growth, we are more than likely to see Mastercard delivering record results this year.

After all, analysts expect the Fiscal 2022 EPS to reach record levels and land close to $10.2, implying year-over-year growth of 21.2%.

Risks Becoming Increasingly Concerning 

In Mastercard’s latest earnings call, Mr. Michael Miebach, Mastercard’s CEO, mentioned that the outlook remains positive despite the current supply chain constraints, geopolitical tensions, and inflationary pressures. However, all these risks have certainly strengthened since that earnings call took place in late January.

For starters, the ongoing war in Ukraine had not even taken place, which has completely shaken geopolitical stability. As a result, Mastercard, along with its peers, has suspended its operations in Russia. While the company has not disclosed how much Russia contributes to its total revenues, we know for sure that there will be some impact on the top line.

Then, when it comes to inflation, risks appear to be elevated as well. CPI in March rose 8.5% compared to expectations of 8.4% and a 7.9% reading in the previous quarter.

While this does not have a direct effect on Mastercard’s results in terms of higher credit risk (the company doesn’t originate or have exposure to loans – it’s just a processor), increased inflation levels could affect consumer spending dramatically, reducing Mastercard’s purchase volumes.

This is also the case regarding the supply chain, with the COVID-19 lockdown in China disordering the world’s supply chain backlog, which could further affect consumer spending due to rising freight costs.

Is the Stock Reasonably Valued? 

Assuming Mastercard achieves Fiscal 2022 earnings close to analysts’ estimates of $10.2, the stock is trading at a forward P/E ratio of about 34.5 at its current price. Despite the ongoing risks, I do not necessarily question the company’s ability to hit this estimate. However, I do find this multiple rather rich as it prices in continuous medium-term growth.

With a number of catalysts that could impact consumer spending in the medium term, it should not come as a surprise if Mastercard’s growth were to stall at some point in the coming years. In that case, I would consider shares somewhat overvalued at their current levels.

Wall Street’s Take

Turning to Wall Street, Mastercard has a Strong Buy consensus rating based on 15 unanimous Buys. The average Mastercard price target of $431.79 implies 22.9% upside potential.

Takeaway

Mastercard is a phenomenal company with numerous qualities and an unparalleled industry moat. The company has retained robust growth momentum following its recovery from the pandemic. At the same time, its profits are likely to reach new records this year.

While I believe that the stock deserves a premium valuation due to its unique and attractive characteristics, there are multiple catalysts in place that could lead to a halt in consumer spending growth. At that point, the risk of multiple compression would be too high. Thus, considering buying at the current valuation could be fairly irrational.

Discover new investment ideas with data you can trust. 

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles