How Would MasterCard’s Value Be Affected If Blockchain Adoption Cuts Into Its Transaction Volumes?

by Trefis Team
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The sharp fluctuations in the price of cryptocurrencies over recent months is proof of the fact that investors are still trying to figure out their values over the long run. Investor opinion remains divided, with some considering all cryptocurrencies worthless (or worse), and some willing to bet millions on what they deem to be the future of payment systems. While you may favor either side of the argument, or you may still be undecided about the future of individual cryptocurrencies, one thing that has become clear in recent years is that the underlying concept of blockchain works. And it is being explored in considerable detail by financial institutions around the globe to allow them to process payments quickly and securely. Notably, many companies now offer blockchain-based payment systems, and this trend is only expected to grow in the future.

Understandably, this will have a negative impact on the legacy business of the world’s largest payment companies – Visa (V), MasterCard (MA) and American Express (AXP) – who have invested billions over the years to set up an end-to-end payment infrastructure globally. Considering a scenario where blockchain-related settlement services eat into 5% of MasterCard’s total transaction volume, this would translate into a ~5% decline in the company’s valuation. Our interactive model for MasterCard lets you modify assumptions like earnings multiples, fees as % of transaction volume and income margin among others to see how sensitive MasterCard’s shares are to its transaction volume.

We maintain a $134 price estimate for MasterCard’s shares, which is below the current market price.

As detailed in the chart above, a decrease in MasterCard’s transaction volume by 5% can reduce its 2018 EPS estimate by $0.30. Using MasterCard’s current forward P/E ratio of 27.5, this represents an ~$8 decline in the company’s share price – or a downside of ~5% from its current share price around $170. The fact that MasterCard’s share price is almost linearly related is easily understood give the fact that more than 90% of MasterCard’s revenues are generated through transaction-related activities.

However, it must be mentioned here that MasterCard has already implemented its proprietary blockchain technology. Its larger competitor Visa also has a similar proprietary blockchain-based payment system, while AmEx uses the Ripple network to process certain payments. So the negative impact of increased blockchain adoption on MasterCard (and its peers) will very likely be mitigated by their efforts in the space.

Think our estimates are off? Create your own estimates by changing the inputs in our interactive model.

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