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Stock of the Month: Mastercard Incorporated (MA)

Written by Donnie Nguyen

May 17, 2020

A GLOBAL DIGITAL PAYMENTS JUGGERNAUT

Mastercard (NYSE: MA) is one of the most well-known and trusted brands in the global payments industry. They have 926 million credit cards in circulation around the world according to Statista. According to Reuters, MA has a 30% market share of the credit and debit card market, only surpassed by Visa (NYSE: V), which has 60%.

From 2015 to 2019, their annual net revenues grew 74.6%, from $9.67 billion to $16.9 billion. This tremendous growth and duopoly-like market share have come with a high price tag for the stock. The stock price rose from an average of $88.19 in 2015 to an average of 241.26 in 2019. That was a whopping 173% return!

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During the pandemic, the stock market got slammed. The S&P 500 declined more than 30% at one point, and MA wasn’t immune to the bear market. At one point, the stock was down 42.4%. It now sits at $278.94, 19.7% off its all-time highs. I think that this is a great time to start a position in this wonderful company.

As always, the stock could go down even more, in which I’d probably pick up more shares. But investing isn’t about trying to find the bottom. It’s about consistently buying great companies at reasonable prices, as Warren Buffett would say. I believe that this recent dip has finally given investors that opportunity.

Mastercard’s Vision

One of Mastercard’s primary goals is to replace the usage of cash and checks around the world with their digital payments technology. In 2019, MA processed 87.3 billion switched transactions. In their most recent earnings conference call, they mentioned that trillions of transactions around the world are still being made by cash and checks. That’s a huge total addressable market and growth potential that Mastercard can try to capture.

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Unlike traditional credit card companies, MA doesn’t loan out any money. Their core business relies on fees to financial institutions for using their network. Fees are charged based on gross dollar volume (GDV) and for each switched transaction. Every time a Mastercard is used for a transaction, they provide authorization, clearing, and settlement.

MA makes money whether or not a consumer pays back the financial institution. The fact that they don’t take on any consumer debt risk makes it a pretty awesome business model.

Challenges and Opportunities from the Pandemic

CHALLENGES

The biggest challenge for the company from the pandemic is decreased spending from consumers. As nations are implementing social distancing measures, non-critical workers are losing their jobs in record numbers. As mobility around the world is being restricted to help slow the spread of COVID-19, fewer people are using MA’s cross-border payments networks. These challenges will impact MA’s top and bottom lines.

The company is monitoring the situation week-by-week. By the end of April, they had already seen stabilization at lower transaction levels. They believe that normalization could happen by the end of the year, meaning that spending could gradually rise to pre-pandemic levels. After COVID-19 is eventually under control with an effective vaccine, the company could be back to its pre-pandemic growth phase again. At that time, I think that their stock price will again reach new all-time highs and continue growing as it did from 2015 to 2019.

OPPORTUNITIES

The biggest opportunity is the acceleration of the secular trend from cash to electronic payments. With more people at home, more purchases will be made online. From food and grocery deliveries, online shopping, to TV streaming, the bulk of purchases will be made digitally. This will increase the importance of payment companies like Mastercard.

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Another opportunity is their contactless security technology using an EMV (Europay, Mastercard, and Visa) chip. Not only does this technology help prevent fraud, but in the pandemic, it helps prevent COVID-19 from spreading. Expect more widespread adoption of this technology.

COMPETITION

Visa has been the only true competitor to Mastercard for a very long time, but they’ve managed to co-exist and keep growing. However, other digital payment options have been emerging. PayPal (NASDAQ: PYPL) and their Venmo app could potentially take away market share from Mastercard. Cryptocurrencies could also come into play.

Mastercard has partnered with PayPal in the past and they have started patenting their own blockchain technology. So it appears that they may have ways to mitigate the risks of both of these potential competitors.

STATS (AT CLOSING 5/15/2020)

  • CLOSING PRICE: $278.94
  • MARKET CAP: 279.98B
  • P/E RATIO (TTM) 35.46
  • P/S RATIO (TTM) 16.58
  • RETURN ON EQUITY (TTM): 147.74%
  • QUARTERLY REVENUE GROWTH (YOY): 3.1%
  • QUARTERLY DILUTED EPS GROWTH (YOY): -6.7%
  • CASH AND CASH EQUIVALENTS (MRQ): $10.2B
  • LONG-TERM DEBT (MRQ): $12.5B

BOTTOM LINE

Mastercard is a great company that’s finally selling at a reasonable price due to the pandemic. I expect their business to be temporarily impacted by decreased consumer spending. Once countries loosen their social distancing rules, the economy and Mastercard may continue their pre-pandemic growth. This could be a good time to enter into a position.

DISCLOSURE

I/we own shares of stock in MA, PYPL

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Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are 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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