[Updated 06/11/2021] Mastercard Update
Having gained close to 80% since the March 23 lows of last year, at the current price near $365 per share, we believe Mastercard’s stock (NYSE: MA) is trading slightly above its near-term potential. The company has seen its stock increase from $203 to $365 off the March 2020 bottom compared to the S&P 500 which rallied almost 90% – the stock is slightly behind the broader market. While the company has posted better than expected results in the first quarter of 2021, its cross-border volume continues to suffer due to the Covid-19 related travel restrictions. Hence, investors are cautiously positive toward the stock.
In the recently reported first-quarter FY2021 results, Mastercard reported net revenues of $4.2 billion – 4% more than the year-ago period. It posted a 7% y-o-y increase in both domestic assessment and transaction processing revenues driven by growth in gross dollar volume activity and the number of switched transactions. However, its cross-border volume continued to suffer in the first quarter as well – down 17% y-o-y, leading to a 23% drop in the cross-border volume fees.
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Mastercard’s revenues of $15.3 billion in 2020 were 9% below the 2019 figure. It was mainly due to a 29% y-o-y drop in cross-border volumes and a 3% increase in rebates & incentives. The company suffered in 2020 due to lower consumer spending levels and Covid-19 related restrictions on travel, public gatherings, etc. Notably, the consumer spending levels have seen some recovery over the recent quarters, which is also evident from the increase in domestic assessment revenues. However, the travel restrictions are still in place, hurting the cross-border fees. That said, we expect the restrictions to be eased, as more and more people receive Covid-19 vaccinations. Overall, Mastercard revenues are likely to touch $18.3 billion in FY2021. Additionally, Mastercard’s P/E multiple changed from just below 34x in 2018 to around 56x in 2020. While the company’s P/E is close to 57x now, there is a slight downside when the current P/E is compared to the previous years – P/E of around 56x at the end of 2020. Our dashboard “What Factors Drove 93% Change In Mastercard Stock Between 2018-End And Now?” provides the key numbers behind our thinking.
[Updated 02/24/2021] Mastercard Stock Is Unlikely To Give Strong Returns In The Short Term
After a 73% rally since the March 23 lows of the last year, at the current price near $350 per share, we believe Mastercard’s stock (NYSE: MA) is trading above its near-term potential. MA, the second-largest global payment solutions company in the world, has seen its stock increase from $203 to $350 off the recent March bottom compared to the S&P 500 which increased almost 75% – the stock is in sync with the broader market and has gained 8% over the last twelve months. However, there is a discrepancy in its stock and revenue growth – the company’s top-line declined by 9% y-o-y to a consolidated figure of $15.3 billion for the last 4 quarters. Despite the negative growth in revenues, investors have favored Mastercard’s stock due to recovery in consumer spending levels, which has improved the transaction volumes in the second half of the year on a sequential basis.
Mastercard surpassed the consensus estimates for revenues and earnings in its recently released fourth-quarter results. It reported net revenues of $4.1 billion – 7% less than the previous year, primarily due to a 29% y-o-y decline in cross-border volumes. Similarly, the payment processing giant’s full-year 2020 revenues slipped by 9% y-o-y to $15.3 billion, mainly due to a 29% y-o-y drop in cross-border volumes and a 3% increase in rebates & incentives. Notably, its gross dollar volume was flat on a year-on-year basis.
Due to the Covid-19 crisis, countries imposed restrictions on business operations, travel, public gatherings, etc. Hence, the cross-border volume fees, which usually contribute around 22% of the net revenues, dropped by 40% y-o-y in 2020. On the flip side, consumer spending has seen some improvement over the recent quarters. Given the expected mass availability of the Covid-19 vaccine and potential recovery in the economy, it is likely to further boost the spending levels, benefiting Mastercard’s revenues. That said, the recovery will likely be gradual rather than immediate and a sudden surge in revenues is unlikely. Additionally, Mastercard’s P/E multiple changed from just below 34x in 2018 to around 56x in 2020. While the company’s P/E is close to 55x now, there is a downside when the current P/E is compared to the previous years – P/E of around 37x at the end of 2019 and close to 34x in 2018. Our dashboard “What Factors Drove 86% Change In Mastercard Stock Between 2018-End And Now?” provides the key numbers behind our thinking.
[Updated 12/4/2020] Mastercard Stock Is Expensive
Having gained 68% since the March bottom, at the current price near $340 per share, we believe Mastercard’s stock (NYSE: MA) has surpassed its near term potential. MA stock has increased from $203 to $340 off the recent bottom compared to the S&P 500 which increased almost 65% – the stock is in sync with the broader market and is up 14% YTD. That said, there is a mismatch between its revenue and stock growth – Mastercard revenues have fallen 4% to a consolidated figure of $15.6 billion for the last 4 quarters from the consolidated figure of $16.3 billion for the 4 quarters before that. The positive investor sentiment could be attributed to the improvement in consumer demand over the recent months, which is likely to help transaction volumes.
Mastercard recently released its third-quarter results, missing the consensus estimates. It reported net revenues of $3.8 billion – 14% less than the previous year. The company derives a big chunk of its revenues from Cross-border volume fees (22%) and transaction processing fees (34%), which have suffered due to the ongoing Covid-19 crisis and travel bans – cross border transaction revenues dipped by 48% y-o-y in Q3. While the economy has seen some improvement over the recent quarter, it is likely to take some time for international travel and consumer demand to recover to the pre-Covid levels. Hence, Mastercard is unlikely to see an immediate recovery in its revenues. Besides, Mastercard’s P/E multiple changed from just above 41x in 2017 to around 37x in 2019. While the company’s P/E is close to 43x now, there is a downside when the current P/E is compared to the previous years – P/E of around 37x at the end of 2019 and close to 41x in 2017. Our dashboard Buy Or Sell Mastercard Stock? provides the key numbers behind our thinking.
[Updated 10/01/2020] Mastercard Stock Is Unlikely To Sustain Its Current Level
After a 66% rally off the March bottom, Mastercard’s stock (NYSE: MA) looks fully valued based on its historic P/E multiples. Mastercard, the second-largest global payment solutions company in the world, has seen its stock rally from $203 to $338 off the recent bottom compared to the S&P which moved around 50%. The stock is leading the broader markets as investors are positive about a rebound in consumer demand over the coming months, leading to higher transaction volumes. Notably, the market has witnessed some negative movement since early September due to a bout of profit-booking after a strong run – MA’s stock is down 6%. However, it is still up 14% from levels seen in late 2019.
Mastercard’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year.
Some of the rise of the last 3 years is justified by the roughly 57% growth seen in Mastercard’s revenue from 2016 to 2019, which translated into a 100% growth in the Net Income figure. Notably, the net income dropped in 2017 mainly driven by higher income taxes due to the enactment of the U.S Tax Act. Further, the net income margin improved from 37.7% in 2016 to 48.1% in 2019, as general & administrative (G&A) and advertising expenses decreased in terms of % of revenues.
While the company has steady revenue and earnings growth over recent years, its P/E multiple has increased. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard ‘What Factors Drove 235% Change In Mastercard Stock Between 2016 And Now?’ has the underlying numbers.
Mastercard’s P/E multiple changed from around 27x in 2016 to just above 37x at the end of 2019. While the company’s P/E has increased to about 42x now, there is a downside risk when the current P/E is compared to levels seen in the past years – P/E of 37x at the end of 2019 and around 33x as recently as late 2018.
So what’s the likely trigger and timing for the downside?
Mastercard is a payment processing giant that provides a variety of services to support credit, debit, and related card solutions of over 24,000 financial institutions globally. The company generates revenue by charging fees for transaction processing and other services. The company derives around 22% of its revenues from International Fees and 34% of its revenues from transaction processing fees. Due to the lockdown restrictions and travel bans in the first and second quarters of the year, both these revenues streams have suffered – the company reported a 19% y-o-y drop in revenues for Q2 2020. However, the economy is likely to see some improvement in Q3 and Q4 as lockdown restrictions have been eased in most parts of the world. This is also evident from the recently released consumer spending data which suggests an m-o-m growth of 8.5%, 5.6%, and 1.9% in May, June, and July respectively. Despite this, it is likely to take some time for the transaction volumes to recover to the pre-Covid levels and Mastercard’s Q3 results are likely to be lower than the year-ago period.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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