MasterCard Inc. (MA) stock has been slowly rising since the company reported second-quarter earnings results that beat analyst estimates on both revenue and profit numbers.
After sliding down steadily during the first half of the year, when the stock moved down from near $100 levels before January to near $80 levels two months later, the stock has recovered nicely to end up just 0.5% down for the year. Thanks to better-than-expected second-quarter results, things are looking much better for investors.
Though I am not a great fan of these short-term, quarterly results-based stock movements, the volatility they bring does provide great entry points for long-term investors who want accumulate stocks over long periods of time, and Mastercard's record of stock swings in such a short span of time is a great example of that.
Mastercard and its rival Visa (V, Financial) are both standing at the cusp of next-generation payment systems, especially the growth in mobile-based online transactions fueled by tech majors such as Apple (AAPL, Financial), Samsung (XKRX:005930, Financial) and Google through their mobile wallet systems. The world is moving toward a cashless economy, and with deep-pocketed tech majors now embracing card issuers Visa and Mastercard are waiting for their next growth wave.
Second quarter net income grew 6.7%, from $921 million a year earlier to $983 million while revenue expanded by 13%, from $2.39 billion a year earlier to $2.694 billion.
The second-largest payment network saw a healthy dose of increased transactions represented by a 14% growth while total cards grew by 7%. The other significant announcement from MasterCard this July was the company’s decision to buy a 92.4% stake in U.K.-based payment processing company VocaLink for $920 million.
“MasterCard hopes that the tie-up of the two businesses will continue to encourage the shift away from the use of cash and cheques while speeding up transactions between customers using MasterCard services. It will also give it a bigger presence in the U.K. market.” – Telegraph.
Ajaypal Singh Banga from MasterCard’s Q2 2016 Earnings Call:
"VocaLink itself is very interesting to us for a couple of reasons. First, when you look at all payment flows in the world's top 50 countries, and this is not just retail payments, ACH represents about 50% of that total. And the potential of Fast ACH is growing, especially given that it is being promoted by a number of regulatory bodies in Europe, the U.S. and in other parts of the world.
"Second, we believe that VocaLink is the best asset in this space, from both a technology standpoint as well as having a very talented group of people who are respected across the industry. Beyond the opportunities available in their primary U.K. market, they have been successful in operating and licensing their Fast ACH technology in other markets, in Sweden, in Singapore, in Thailand. They're also the primary supplier of Fast ACH technology to the clearing house in the U.S.
And finally, the ability to see both card and ACH transactions would enable us to offer an even broader range of data analytics and other services to our partners. Our card network is empowering our growth in both consumer and commercial payments for many years. And with this acquisition, we will now have a new set of capabilities to capture additional opportunities in B2B, in P2P and government payment flows, regardless of what payment rails are used.”
This is what the National Automated Clearing House Association says:
“The ACH Network is a unique payments system providing for robust versatility with its inherent ability to process credit and debit transactions, payments and information together, domestic and international transactions, and more,” said Janet O. Estep, president and CEO of NACHA. “It is this flexibility and adaptability that has facilitated new payments capabilities to meet the evolving needs of end users, and ultimately contributed to the Network’s consistent growth. With the advent of additional capabilities, such as person-to-person (P2P) payments, which was implemented in March of 2014, and Same Day ACH, which will become available in September, we expect to see continued growth and advancement of the Network and ACH payments.”
ACH transaction volume was in excess of 24 billion payments in 2015. And it’s a growing figure because this is the first time ACH has seen billion-plus growth in transactions two years in a row. The entire volume of transactions was more than $41.6 trillion over the ACH network. That’s more than half of the entire world’s GDP of $73.4 trillion according to the World Bank.
My take on MasterCard stock
That kind of volume is exactly what MasterCard is after. Moreover, with B2B transactions seeing strong ACH growth, this trend will continue as we keep moving toward a cashless economy.
MasterCard’s acquisition of VocaLink does bring it the talent it needs to capture this market’s growth. Despite the size and scale that MasterCard and Visa have attained, they’re constantly hunting for that extra tool, that extra edge they can gain to retain their massive moats within the industry. These companies have found a way not only to stay relevant but also to keep disruptors at bay.
As such, these are stocks that you keep adding to your position whenever you see a dip and then let them keep giving you long-term benefits year after year.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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