Mastercard (MA) is one of the leading payment card providers globally, and their business model has dominated for decades. Their share price chart shows one of the smoothest uptrends I have ever seen, which is testament to the strong, consistent cash flows the company generates.
During early 2020, their share price fell off a cliff and was down 37% due to the pandemic market crash, reduced consumer spending and fears of international payment segment impact. However, by August 2020, the share price had risen substantially, up 73% from the lows, though ever since then it has been moving sideways and is uncharacteristically volatile.
Despite the pricing troubles, the company's business model is still strong, and they have even been expanding into the crypto industry, which I believe will drive long-term growth.
Reinforcing my bullish thesis is the fact that Ray Dalio (Trades, Portfolio) of Bridgewater Associates, the world's largest hedge fund, was buying shares of Mastercard in the fourth quarter of 2022, during which shares traded at an average price of $359 apiece; this is about 9% above where the stock trades now. Overall, there have been more guru sells than buys of Mastercard recently, but I am inclined to agree with Dalio.
Business model
Mastercard is one of the leading credit card providers globally. In the U.S., they have a 34% market share, which is second only to their rival Visa (V, Financial) with a 49% market share. The company is a payment facilitator, which acts as a middle man between buyers and merchants. They assist with the authorization, clearing and settlement of transactions. For their services, they charge an interchange fee (aka a “swipe fee”) to merchants.
The company believes it has an advantage over new fintech payment disruptors with their “multi-rail network” which covers domestic, cross border, card-based and account-to-account transactions.
Mastercard is also embracing cryptocurrencies and non-fungible tokens (NFTs) extensively. They have recently filed 15 trademarks related to the Metaverse and blockchain technology. The company made a payment deal with leading crypto exchange Coinbase (COIN, Financial) in January to become its payments partner for NFTs. They also have set up an integration with OpenSea, the leading NFT marketplace. Some people may wish to invest into crypto directly, but after the recent crash, some may not have the stomach for it. Thus, just like the company's slogan, "for everybody else there's Mastercard" - I believe some investors wanting safer exposure to crypto could turn to the companies that are utilizing it in their businesses.
They launched a “pay by bank” service in the U.K. way back in 2016, and while it was slow to get off the ground, Mastercard still has hope it will someday have significant adoption. The service is a game-changer as it enables U.K. consumers to pay for goods and services directly from their bank account at a merchant checkout via mobile banking apps. The beautiful thing about this service is no payment details or password is required, you can even view your balance while checking out and see it update instantly. For merchants, adoption of a pay by bank system means there is less friction at the checkout, which ultimately boosts conversions. I believe this service has major potential, and Mastercard plans to roll it out internationally after testing in the U.K.
Recent earnings results
Mastercard's most recent full-year earnings results showed revenue grew by a substantial 23.4% to $18.8 billion in 2021, up from just $15.3 billion in 2020. The company’s cross-border payments business saw declining revenues in 2020, which is why we are seeing such a high bounce back.
Operating income also grew a substantial 39.6% in 2021 to $10 billion, up from $7.2 billion for fiscal year 2020. In addition, the company has maintained its strong operating margin above 54% and high gross margin of 76%.
Cash flow from operations also grew substantially to $9.4 billion for fiscal 2021, up 30% from $7.4 billion in fiscal 2020 and up 16% from $8.1 billion in fiscal 2019. The company also paid a $1.7 billion dividend (equating to a 0.55% yield) and repurchased a staggering $5.9 billion worth of shares in 2021.
Valuation
The GF Value chart, a unique intrinsic value estimate from GuruFocus, indicates the stock is modestly undervalued at the time of writing.
Mastercard breaks convention when it comes to valuation, with a price-earnings ratio of 34 being “cheap” for the company when compared to historical multiples. The valuation tracks their rival Visa very closely, but Visa tends to trade at a discount relative to Mastercard. This could be due to Mastercard's higher return on invested capital.
Overall, I believe Mastercard is dealing with changes in the payments industry well. The company is aware of the threats from blockchain technology and thus has invested into the space and filed a series of trademarks, which I think is a smart strategic move.
Mastercard is also aiming to leverage its partnerships with incumbent banks, and the pay by bank app could be a real game changer and help them to maintain their competitive advantage if they manage to get it to take off with consumers. Relative to historically high valuation multiples, the stock is trading close below its historical average price-earnings ratio of 40 and thus could be undervalued.
