tiprankstipranks
Tech Innovations to Drive Mastercard’s Growth
Stock Analysis & Ideas

Tech Innovations to Drive Mastercard’s Growth

Mastercard Inc. (MA) Class A shares hit an all-time low of $305.61 on March 8 due to ongoing economic and geopolitical tensions in Europe. The onset of the Russia-Ukraine war has crippled economies and financial systems the world over.

Over the past five years, the S&P 500 Index has gained 75.8% against a humongous 189.8% gained by Mastercard. However, year-to-date, the SPX is down 13.1% compared to a 15.1% fall in the MA stock. The MA stock is hovering far from its yearly high of $401.50.

Mastercard acts as an intermediary between the bank and the final consumer by giving access to its payment network. The company provides payment solutions across 210 countries in over 150 currencies.

MA’s major revenue source is the fees it earns from banks that issue Mastercard branded cards on a gross dollar volume (GDV) basis. Its revenues are directly proportional to the GDV.

Does Russia-Ukraine War Impact MA’s Performance?

Unhappy with Russia’s untimely invasion of Ukraine, Mastercard decided to shut its operations in the invading nation. Mastercard has operated in Russia for the last 25 years.

According to Reuters, Mastercard’s exposure to Russia in terms of net revenue was 4% in FY21. While its exposure to Ukraine stood at about 2% of net revenue.

Although the exposure does not pose a large threat to its performance, it should be noted that Russia has turned towards China’s UnionPay network system along with its domestic Mir payment system to solve the issue. Should the partnership be deem lucrative, it may completely block MA from reentering the market in the future.

Financial Performance

Diving deeper into MA’s financial performance reveals that the company has recouped to its pre-pandemic level of operations. In FY21, the company’s net revenue jumped 23% year-over-year to $18.88 billion and net income leaped 35% to $8.69 billion. Notably, Mastercard’s five-year compound annual growth rate (CAGR) for net revenue was 8.6% and its CAGR for net income was 17.3% in the same period.  

Remarkably, Mastercard’s gross dollar volume (GDV) in FY21 advanced 21% year-over-year to $7.7 trillion. Similarly, its cross-border volume grew 32%, and switched transactions increased 25% compared to FY20.

The company noted that as cross-border travel and consumer spending resume normalcy, Mastercard is poised to witness accelerated growth in its future performance.  

As per a Nilson Report, global purchase transactions accounted for 500 billion in 2021 and are expected to reach 800 billion in 2026, representing a growth of 45%. Thus, Mastercard has a high potential of capturing the market and growing its business as it is one of the biggest players in the payment industry.

The Need for Innovation

The financial payments sector is constantly evolving, with technological innovations driving the route to success. Potential disruptors to traditional card and online banking transactions include Buy Now Pay Later (BNPL), crypto-linked payments, and the rising usage of digital wallets and instant payment options.

Meanwhile, Mastercard has been quick in catching up with the latest trends. MA already has a Mastercard Installments BNPL offering. The BNPL service is a very attractive customer tool as it enables customers to buy the product first and pay later in installments. It has the potential to convert window shoppers to active customers by giving them additional purchasing power, thereby increasing both online and in-store sales.  

Furthermore, the company is also accelerating its crypto card partner program through its acquisition of cryptocurrency firms Bakkt and CipherTrace. Enabling crypto-linked credit and debit card services will open doors for Mastercard’s enhanced growth potential.

Yesterday, MA announced a five-year partnership with Zeta to jointly issue cards globally and ensure a simplified processing system through Zeta’s modern, cloud-native, and fully API-ready credit processing stack.

Deterrents to Growth

According to a Wall Street Journal report, Mastercard and rival Visa are intending to increase interchange fees on credit cards charged to merchants for using their payment networks. Both companies said that the hike was long due, but paused due to the pandemic.

The interchange fees are decided by the card network company and are paid by merchants to the card-issuing institutions. To give an idea of the magnitude of these fees, U.S. merchants paid approximately $55.4 billion in interchange fees in 2021, according to Nilson Report. Some of these fees are passed on to customers by hiking product prices, and by charging extra to customers who pay via credit cards instead of cash. The increased fees will be effective in April.

Though the fee hike does not directly impact Mastercard’s revenue, it does hamper the usage of credit cards as consumers shy away from expensive payment solutions.

Additionally, Mastercard is also planning to increase fees on rewards-backed credit cards for small and medium-size supermarkets. The step is taken to expense towards the freebies provided in the rewards program.

On a positive note, however, MA has decided to decrease the cost for a few smaller merchants (transactions below $5) and hotels, day-care facilities, and other companies which have taken a severe hit from the pandemic.

MA Valuation

Recently, five-star analyst Ivan Feinseth of Tigress Financial increased the price target on the MA stock to $472 (50.2% upside potential) from $460 and reiterated his Buy rating.

Feinseth’s optimism on the stock stems from the, “Ongoing secular shift to electronic and other new payment technologies.” The analyst also approves of Mastercard’s multiple acquisitions of fintech companies, which will enable the company to increase its global penetration and offer innovative products to customers.

The analyst’s price target is based on 31x 12month projected earnings before Interest Tax Depreciation Amortization and Restructuring (EBITDAR) expectations of $15.06 billion. Feinseth forecasts 25.41% year-over-year growth on the EBITDAR.

Wall Street analysts have awarded the MA stock a Strong Buy consensus rating. These are based on 13 unanimous Buy ratings. The average Mastercard price target of $431.23 implies 37.2% upside potential to current levels.

While the overall outlook for the payments industry remains bullish, Mastercard will have to remain a forerunner in innovations to grab a larger chunk of the market and increase its moat. Moreover, increased competition from domestic players across different nations also poses a threat to its growth and survival.  

Download the TipRanks mobile app now

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Read full Disclaimer & Disclosure

Trending

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

Popular Articles