MasterCard (NYSE:MA) and Visa’s (NYSE:V) shares have rallied impressively in recent months,with each company’s stock up more than 40% over the past six months. This is attributable to a variety of factors including improved consumer data, stronger than expected earnings and an overall market rally. The companies’ share prices have been largely unaffected by the recent security breach at payment processor Global Payments, Inc (NYSE:GPN), and we expect that the impact on the two companies will be minimal. We believe that MasterCard and Visa are well-positioned to benefit even further from the aforementioned factors as well as massive growth potential in mobile payments.
We have revised our price estimate for MasterCard to $465, about 5% ahead of the current market price, to reflect this stronger outlook and the company’s recent performance. We are in the process of revisiting our forecasts for Visa.
Higher penetration, spending to drive volumes
According to Trefis estimates, MasterCard derives more than half of its value from assessment fees and international transaction fees. Each of these revenue streams are largely driven by transaction volumes and are therefore highly vulnerable to macroeconomic factors. As consumer sentiment and spending improve, we expect substantial growth in the gross dollar volume of transactions using MasterCard-branded cards. Additionally, in markets such as India consumers are increasingly shifting their method of payment from cash to credit and debit cards, which we expect will also drive significant volumes for MasterCard.
Mobile payments provide significant opportunity
The company also recently launched the MasterCard Mobile Money Partnership Program, which will enable underserved international consumers to make purchases using their mobile phones even in the absence of a debit card or standard bank account.  This should allow MasterCard to eventually generate revenues in geographies in which traditional banking and credit card penetration is low. As mobile payments continue to increase worldwide, the company’s early adoption of such products should prove beneficial.
Forecasts updated to reflect industry outlook
We have updated our analysis for MasterCard to reflect these developments. We expect the company’s gross dollar volume to exceed $5.5 trillion by the end of our forecast period, on nearly 40 billion total annual transactions. Our forecast also incorporates the litigation liability related to merchant lawsuits against the company as well as a reduced discount rate to reflect the relatively low volatility of its stock.Notes: