Mastercard Inc. (MA, Financial) is one of the largest financial services companies on the planet. We all know someone who has a Mastercard credit or debit card – probably many someones. As the world moves ever further toward a cashless society, Mastercard, a company that has been at the forefront of non-cash payment innovation for many years, is worth another look.
As 2017 winds down, what can we say about Mastercard’s stock performance this year? Not surprisingly in this market, it has done pretty well, enjoying a strongly entrenched position in the American financial system and boasting solid financials.
And there is still a lot of market to be claimed: Cash is still used for 80% of transactions around the world. That number is dropping every year as more and more people and businesses abandon paper for plastic – or for ones and zeroes. Mastercard is working to seize a big piece of that pie, while at the same time both retaining its current massive user base and expand from its core business.
Will Mastercard's efforts be enough to see it triumph in the years ahead? Let's take a look at the company's recent performance, as well as its plans for the future, to see if we can find out.
An impressive growth machine
Financial performance remains a highlight for Mastercard. In the third quarter, the company turned in an impressive performance, with net income of $1.43 billion on $3.4 billion in revenue, up from income of $1.18 billion on $2.8 billion in revenue the previous quarter. That spike in growth is largely attributable to a surge in purchase volume, which was up 11% for the quarter. Double-digit growth is visible in every region in which the company operates, especially in the Asian market. MasterCard Send, the company’s push payments program, has also shown promising signs in its early outings.
In an increasingly card payments-dominated world, the MasterCard brand benefits. Every time someone swipes one of the 2.4 billion MasterCard and Maestro cards somewhere in the world, Mastercard gets its transaction fee. Those continue to add up and drive very significant value. In the third quarter, the company posted a 21% profit. Earnings were remarkably robust, posting a 9% positive surprise over consensus estimate.
With solid earnings and continuing market growth, Mastercard looks poised to continue its streak of financial success into 2018. Clearly the Street seems to think the future is mighty bright. Many analysts and commentators have long sung the praises of Mastercard. Motley Fool’s Stock Advisor has been particularly effusive of late and the investment banks and research firms have likewise been generally positive. Among their number, the consensus recommendation is strong buy (based on 24 analyst recommendations), a consensus broken by just a few, lukewarm dissenters who merely recommend the company as a buy (three analysts) or hold (one lonely, middle-of-the-road thinker).
New offerings bring opportunity and risk
It can be argued the mobile payment space is getting crowded. So it is little surprise that Mastercard is seeking to differentiate itself in a number of ways from major competitors such as Visa (V, Financial) and American Express (AXP, Financial).
Mastercard’s choice to expand its offerings beyond its core payments business and into consulting and advisory practice, which has so far contributed significantly to revenue growth, is the most significant example of the company seeking to set itself apart from the pack. It has executed the launch of these new lines successfully thus far, building on the infrastructure of a powerful financial services company.
Yet the issues inherent in such a business model are clear, namely the issue of scalability: As an expertise-intensive business model, the ability to scale is fundamentally limited. Thus far, it has contributed to Mastercard’s bottom line, but whether it can do so over the next several years remains to be seen. Leveraging a degree of financial knowledge that newcomers to the mobile payments world, such as Stripe, could keep Mastercard at the forefront of an industry that faces significant disruption. Yet the fundamental economics of the consulting and advisory services sector is such that it may also end up producing margin contraction and greater susceptibility to cyclical market swings.
Competitive pressures showing
Competition, from both incumbents such as Visa and American Express, as well as from newcomers to the mobile payments world, is set to challenge Mastercard and its market position. So far, Mastercard has fought back against encroachment via a range of strategies, such as increased rebates and incentives, as well as amped up loyalty programs, to keep customers sweet and attract new MasterCard holders.
Rebates could end up representing a third of revenues in 2017. If that trend continues, top-line revenue growth might prove too little to cover the giveaways. The mounting pressure to increase rebates and other incentives is indicative of a highly competitive business. Yet Mastercard can afford such tactics at present thanks to strong earnings growth and expansion in new markets. If it can use sweeteners to retain users and grow market share, it could yet starve out competitors trying to muscle in on its turf.
The verdict
Balancing growing earnings in core and new businesses against mounting competitive pressures of unknowable influence (over the long term, anyway), it is difficult to recommend Mastercard as a strong buy like so many of the Wall Street shops have done. The price-earnings ratio of nearly 35 and year-to-date share price appreciation of nearly 40% make my value instincts worry.
Overall, while a solid company that probably has better than average growth potential (despite competitive pressures), the price is a bit too steep to recommend jumping in. If there is some pullback – more than the recent little dip certainly – then it might be worth a flutter. For now, there are better opportunities out there.
Disclosure: I/We own none of the stocks mentioned in this article.
