Mastercard Inc. (MA) is one of those companies that need no introduction. With the world moving towards a cashless future, modern wallets often carry more than a couple of Mastercards and Visas. Essentially, the two companies have created a duopoly in the global payment processing industry.
Mastercard is well-positioned to benefit from the ongoing tailwinds in the transition towards a cashless society with its growing e-commerce sales, strong pricing power, and deep industry moat.
With a strong recovery in its most recent Q3 results compared to the negatively impacted transaction volumes due to COVID-19 a year ago, I believe that Mastercard shares have more upside ahead. (See Analysts’ Top Stocks on TipRanks)
Recent Results
Mastercard’s Q3 results showcased robust improvement from last year’s earnings impacted by the pandemic. Global purchase volume increased 5.3% sequentially or 24.9% year-over-year (23.2% in constant currency). Specifically, U.S. purchase volume came in 0.7% higher than the previous quarter and 22.9% higher year-over-year.
Following robust volume recovery, Mastercard’s margins and profits have not only normalized but have even exceeded the company’s pre-pandemic levels.
Keep in mind that Mastercard’s profitability is almost royalty-like, with the company’s gross margins being literally 100%. As Mastercard’s revenues keep expanding on the back of a cashless society, the company has to take on little to no added operating expenses, essentially “perpetually” increasing its net income potential.
In Q3, adjusted EPS moved 10% beyond Mastercard’s pre-COVID-19 levels, boosted by acquisitions and near-record net income margins, which touched a preposterously high 48.4%.
In addition, it’s noteworthy that cross-border volume fees remain almost 16% under 2019 levels, which implies there is ample room for accelerated growth to be sustained over the next couple of years as the traveling industry continues to recover.
Regarding Rising Inflation
Lately, investors worldwide are worried about the record levels of CPI inflation in the U.S., which came in at an annual 6.2% in October. This marked the steepest incline in over 30 years.
Assuming consumers’ purchasing power remains strong, Mastercard will not be directly negatively impacted during a highly inflationary period. On the contrary, Mastercard’s profitability is likely to even further improve since processing fees work on a percentage basis. Higher prices translate to higher gross dollar volumes, which leads to higher fees on aggregate for Mastercard.
The Valuation
Mastercard is expected to generate EPS of around $8.25 in Fiscal Year 2021, implying a P/E ratio of about 42 at the stock’s current price levels. The stock’s valuation expansion has also pushed the yield near all-time low levels at just 0.51%.
While this multiple may sound rich, and it indeed is for a rather mature company, Mastercard’s EPS is forecast to rapidly improve in the coming years. Analysts expect annualized EPS growth of at least 20% through 2025, which justifies the current premium, in my view, especially when considering Mastercard’s deep moat and inflation-resistant business model.
For this reason, I am bullish on the stock.
Wall Street’s Take
Turning to Wall Street, Mastercard has a Strong Buy consensus rating, based on 11 unanimous Buys. The average Mastercard price target of $441.09 implies 27.6% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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