Mastercard Inc – How a Cashless Economy Earns Cash for Investors

Written by Donnie Nguyen

June 8, 2019

MasterCard credit card

There is no denying that the digital economy is upon us, and it’s changing the way we live, conduct business, and interact. Paper records are being replaced by digital storage, email has all but killed the U.S. Postal Service, Kodak was bankrupted by digital cameras, and smartphones destroyed printed phone books. All these items were once important to daily living, but as technology has evolved, they have been replaced by better options. Now, cash is being replaced by other forms of payment the way all of these technologies were pushed aside in the past.

The Move to a Cashless Society

Make no mistake – cash currency is a type of technology. Cash itself replaced coins as the primary payment method, which in turn had already replaced raw metals (silver and gold) as a means of payment. It is easy to look in the rearview mirror and see exactly how and why these items became obsolete, but it’s much harder to look forward and identify how and when current technology will be replaced or improved.

In the current environment, it is clear that paper currency is starting a slow decline in usage as we continue to evolve into a cashless society. As with so many items before it, the challenge is not determining whether cash is going away. It’s figuring out when it will go away and what or who will be the greatest benefactor of the disappearance of cash in the future. The challenging part of that forward-looking prediction is that cash is not being replaced by any one single item. However, credit services companies like Mastercard, Inc. (MA) are sure to benefit in some capacity.


Changing Payment Landscape

While the majority of Americans still carry cash, a recent CNBC survey found that 34% of respondents under age 50 said they do not make any purchases using cash in a typical week, and cash usage is undeniably declining as debit and credit card usage is increasing.

The 2017 Federal Reserve Payments study shows that the total number of card transactions increased at a compound annual rate of 8% from 2012 to 2015 and increased by 10.4% and 9.4% year over year from 2015 to 2016 and 2016 to 2017.

Mastercard and other payment processors benefit from total transactions, but they benefit more from the total dollar value of transactions since revenue is often derived as a percentage of the total transaction value. A closer look at the Federal Reserve Payments study shows that the dollar value of transactions increased by 40% from $4.65 Trillion in 2012 to $6.48 Trillion in 2017.

The overall landscape and industry tailwinds will favor payment processing companies in the coming decade. As a transaction processing and service company, Mastercard benefits from low operating costs and tremendous operating margins exceeding 50%, but there are a lot of reasons why Mastercard specifically should perform well against other similar companies.

Mastercard Inc. Valuation

At first glance, Mastercard stock may appear expensive at the current price. The stock is trading at a trailing 12-month Price to Earnings ratio of roughly 40, which is seemingly high on a stand-alone basis. By historical standards, the stock is very close to its highest 5-year P/E of 42.6 and well above the 5-year median P/E of 31.2.


However, on a forward basis, assuming the company continues to reach its revenue and earnings targets (which it has exceeded every quarter for the last four quarters), the forward P/E is slightly more reasonable at 27.9. More importantly, though, is how the stock compares to its competitors in credit services and why the current price level may still be justified on a relative basis against the broader credit services industry.

A brief look at the closest competitors provides a more favorable view of the company in the context of its own industry.

There is a reason that Mastercard stock is trading at a higher valuation than both its own historical standards and its competitors, and that is because it has been outperforming the broader credit services industry on several metrics and is expected to continue outperforming. Investors are clearly pricing in the growth expectation into the current market valuation. Not only is Mastercard outperforming against its peers on a relative basis, but there are also additional attributes that make the company attractive on a historical and forward-looking basis.

Mastercard Inc. management has not only been effective in growing the overall revenue of the company, but it has done it in a way that balances growth efforts with bottom line performance. As revenue growth has outperformed that of many other credit services companies, margins have also remained stable, free cash flow has grown significantly, and dividends have increased.

In addition to compelling past and future expected financial growth metrics, stock buybacks should continue to enhance overall price performance in the coming years. During the first quarter of 2019, the company repurchased 8.7 million shares and paid $340 million in dividends with another $4.8 billion still authorized for further share repurchases.


Within the credit services industry, Mastercard presents a clear investment opportunity. As with any investment, understanding risks and industry headwinds is an important component. 

Regulatory Risks to Payment Processing and Credit Services

As many retailers are attempting to move to completely cash-free payment methods, regulators are watching closely. Any time significant changes and trends threaten to upend certain ways that our society and economy operate, regulators and lawmakers will want to understand how these changes might affect the general public. In the case of digital payments and the transition away from a cash society, lawmakers have two primary concerns – 1) The effects on low-income households that still rely more heavily on cash for purchases, and 2) Identity theft through massive data breaches at credit services companies.

Of course, it would benefit credit card companies for more retailers to stop accepting cash, but they have to tread lightly on the subject. Lawmakers in some states are already trying to pass legislation that would require retailers to accept cash for fear that these practices discriminate against low-income households. At the same time, other states are continuing to pass legislation regarding data breaches and identity theft that can potentially create additional costs and regulatory hurdles for credit services companies to overcome.

Regulators are clearly beginning to attack the concerns that are evident in a move to a cashless society.

Change is Certain and Benefactors of Change is Evident

Though legislation and regulatory changes may extend the time it takes to arrive at a more completely cashless society, there is no doubt the change is occurring and will continue in the foreseeable future. Given the change that is coming, it’s easy to see that many companies along the supply chain of credit services and digital payments can benefit.

The next step is determining which companies are the strongest competitors that, in turn, can provide the greatest investment opportunities to shareholders. Based on the current environment, Mastercard Inc. will likely be a top competitor in this changing landscape the same way it has in the past.

Mastercard (MA) Stats as of June 7, 2019

  • Closing price: $265.80
  • Market cap: 271.5B
  • P/E (TTM): 44.4
  • EPS (TTM): $5.99


I/we own shares of stock in DFS.

Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.

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Donnie Nguyen

Donnie Nguyen

Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.

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