There was a lot of caution around Mastercard (MA, Financial) as a company when we were in the middle of the Covid-19 pandemic. With global economic uncertainty and spending on a low, some investors were unsure of grabbing the stock even when it was below the $250 levels.
However, the stock has since climbed to new highs as the company behind it is making the most out of the fintech and e-commerce opportunities. There is no doubt that Covid-19 has had an impact on the financials of the company, but it has also opened new growth opportunities given the accelerated need to automate business-to-business payments, a preference for contactless transactions and rapid adoption of e-commerce.
The company has been outperforming its rival Visa (V, Financial) in terms of growth in recent years and is well established to gain momentum at the forefront of a rapidly-evolving payments industry. The management sees fiscal stimulus as an important interim measure in the near term and continues to believe that travel will improve, which may lead to an increase in the cross-border transaction volumes.
Financial performance
Mastercard reported a top-line of $4.12 billion for the most recent Q4 2020 result, which implies a 6.66% drop as compared to the $4.41 billion number reported in the corresponding quarter of 2019. The fall was largely a function of a 29% drop in cross-border transactions, which are an important revenue driver.
However, the result was a visible recovery from the lowered global spending during the preceding quarters on account of the economic uncertainty, and the company beat the analyst consensus estimate of $4 billion.
Mastercard reported an operating margin of 51.24%, which was lower than that in the same quarter of last year, and its net income for Q4 2020 was $1.79 billion. The company's adjusted earnings per share (EPS) of $1.64 surpassed the average Wall Street expectation of $1.52.
In terms of cash flows, Mastercard generated $2.25 billion in the form of operating cash flows, which was lower than the previous year, but this number is expected to expand with the company's new collaborations.
Expanding collaborations
Mastercard has always kept innovation and expansion as its key priority in the business, and it continues to do so with its recent deal with NatWest Group of Credit. The group, which includes big brands like NatWest and Royal Bank of Scotland, is expected to move its entire debit portfolio to Mastercard across all consumer and business product lines. Notably, this migration of 16 million debit cards will contribute to the overall debit share of the company in the UK.
In addition to this, Mastercard also enhanced its relationship with Deutsche Bank (XTER:DBK, Financial)by becoming an exclusive international scheme partner in which a total of 10 million consumer and commercial credit and debit cards will be reissued to Mastercard-branded products.
Apart from this, the company has also partnered with Citi Plex account on Alphabet's (GOOG, Financial)(GOOGL, Financial) Google Pay, providing customers the tokenization services with the help of a digital debit Mastercard.
Most recently, the management announced that Mastercard will now be the exclusive network for Aeroplan co-brand program in the U.S. with J.P. Morgan Chase Bank (JPM, Financial) and Air Canada (TSX:AC, Financial). All of this taken together further strengthens the company's position in the market and is expected to drive new revenue streams.
Fintech growth and the Engage platform
The Mastercard management has been working towards expanding its Engage platform that will offer customers convenient access to a wide network of qualified fintech alliances that can deploy Mastercard Digital First Solutions. The management believes that the trend of high volumes of digital payments is expected to sustain beyond the pandemic, which will continue to boost the fintech space in 2021, and the companies are trying their best to meet the demand for a hassle-free virtual payment experience.
The Engage platform, which provides an end-to-end digital payment solution, will cater to this need. It consists of partners that offer components and integration abilities across the Digital First customer journey to deliver an uninterrupted transaction experience.
Building on the fintech momentum, Mastercard has established a collaboration with Walgreens (WBA, Financial) which includes issuing a new credit product. This would help enable a contactless shopping experience, mobile-first money management, and rewards via the Walgreens app. This evolution in the payments space has led me to believe in the future growth prospects of the company.
Final thoughts
As we can see in the above chart, Mastercard's stock has outperformed its closest rival, Visa, in the past 12 months. The company's net margin of 41.9% and its triple-digit return on equity are important factors that need to be taken into account when we look at the valuation of the company.
Mastercard is trading at a price-earnings ratio of around 57 times, which is on the higher side, so there is limited scope for multiples expansion. However, a strong recovery in cross-border transactions should be expected in 2021, which should definitely drive Mastercard's top-line. Overall, I believe that the company still has the potential to outperform the indices.
Disclosure: No positions.
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