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Robert Stephens, CFA
Robert Stephens, CFA
Articles (370) 

Mastercard’s Strategy Suggests Further Stock Price Growth Ahead After 60% Rise

The company appears to have a solid plan to drive profitability

September 06, 2018 | About:

Mastercard (NYSE:MA)'s strategy looks set to have a positive impact on its stock price performance. The company is investing heavily in its product offering, while broadening the range of services that it offers. It is also appealing to new entrants in the banking industry through a bundling of services. With the overall prospects for the global economy being strong, the stock could therefore offer capital growth potential.

Its recent second quarter results showed a rise in net revenue of 20% to $3.67 billion, with earnings per share up 36% to $1.50. Further growth could be ahead, which suggests the stock may offer investment potential.

Broader offering

In the last yearm Mastercard's stock price has risen 60%. That’s a stronger performance than the S&P 500, which is up 18% in the same time period

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A potential catalyst on the Mastercard stock price could be its decision to broaden the range of products and services it offers. It is seeking to gain a larger share of the rapidly expanding digital payments market through offering services that are beyond its card-based network. For example, its acquisition of VocaLink for $920 million in 2017 allows it to offer real-time payments. The company also offers pay-by-bank applications that allow consumers to use their bank accounts to directly pay for online purchases.

A broader range of services has led to several notable client wins in recent quarters. The company recently announced a partnership with health insurer Anthem, as well as with L.L. Bean’s consumer credit card offering. PayPal also selected the company for its new Venmo card, which allows users to access their funds online wherever they see the Mastercard logo. Further client wins could be ahead as the company diversifies and expands its product range at a time of fast-paced change in the payments industry.

Long-term growth potential

Mastercard’s capability of winning new business could be improved by a decision to bundle a number of different services with its core payment infrastructure. This could prove to be particularly popular with newer banks, with their limited capabilities in areas such as fraud management, loyalty and data analytics meaning that they are generally positive about obtaining those services from Mastercard. Offering such services in one bundle could help to build deeper relationships with clients, and make Mastercard an increasingly integral part of their businesses. This may lead to a wider economic moat and a higher chance of repeat business in the long term.

The company continues to invest in a variety of products and services. It is taking the extra margin that it makes on the core business and investing it in a variety of areas that could help it to take a larger slice of the digital payments market. While some of the areas in which it is investing are relatively low margin right now, in the long term they could provide the company with incremental revenue streams in an expanding digital payments market.

Possible risks

Mastercard’s financial performance could be hurt by a changing outlook for the world economy. Since its revenue is closely linked to the performance of the global economy and the level of retail spending, tightening monetary policy has the potential to limit its growth rate over the medium term. In the U.S., interest rates are forecast to continue their recent rise so that they reach 3% in 2020. Higher interest rates are also forecast in the eurozone, expected to rise from zero to 0.75% by 2020. Alongside this, the potential for a full-scale global trade war could also inhibit economic growth, which may harm the company’s financial future to at least some degree.

The forecast growth rate for the world economy, though, remains relatively robust. In the U.S., the GDP growth rate is expected to be above 2.5% through 2019. Low unemployment levels and relatively robust consumer confidence levels could keep retail spending moving higher over the medium term. In the Eurozone, GDP growth is expected to be around 2.2% next year. A higher oil price is driving demand in oil-producing countries, with the overall global economy outlook being generally positive. This could allow Mastercard to generate further growth in future.

Verdict

The growth prospects for Mastercard appear to be positive. The company’s strategy of broadening its services could lead to additional client wins. Similarly, further investment in its offering and a bundling of its services could help it to appeal to new banks as it seeks to grab a larger slice of the growing digital payments industry. Although macroeconomic uncertainty has increased in recent months, the prospects for the global economy still seem to be bright. Therefore, further stock price growth could be ahead for the company over the long run.


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