Mastercard Inc.'s (MA, Financial) investments in new products and services could catalyze its financial performance. The electronic payments specialist is seeking to differentiate itself from rivals through enhancing the customer experience, while increasing the size of its potential customer base.
While the company trades at a relatively high valuation and is experiencing a mixed operating environment, its investments in new geographies could strengthen its long-term position in fast-growing markets.
Even though it has gained 35% in the last year versus a 7% rise for the S&P 500, further capital growth could be ahead.
Partnership potential
The company is working with an increasingly wide range of partners to offer an improving customer experience that may lead to a stronger competitive position. For example, it is partnering with Apple (AAPL, Financial) and Goldman Sachs (GS, Financial) on the Apple Card. It is a credit product that leverages Mastercard’s tokenization technology of fraud tools, while offering enhanced rewards in order to provide a frictionless user experience. The card is expected to lead to additional collaborations with Goldman Sachs.
Mastercard is also collaborating with T-Mobile (TMUS, Financial) on its new mobile-first checking account, T-Mobile Money. This allows consumers to manage their finances and make withdrawals through an app on their smartphone. In addition, the company is leveraging its partnership with BNP Paribas (XPAR:BNP) in Europe to provide over 4 million credit cards in an agreement that will be complemented by a full suite of services. This includes identity check mobile security features as well as spending controls. The deal could strengthen the company’s position in Europe and increase its market share.
New products
The company’s investments in the safety and security products space could increase the size of its total addressable market. For example, in the most recent quarter, it announced the acquisition of global e-commerce fraud and dispute management network Ethoca. The network enables merchants and insurers to share information so that fraudulent transactions can be stopped and the cardholder can be refunded without the chargeback process being required. Ethoca reduces costs for merchants and has the potential to scale up beyond its current exposure to 40 countries.
Mastercard is also aiming to improve its competitive position through providing merchants with a more seamless user experience. The acquisition of Vyze in the most recent quarter will allow the company to connect merchants with a range of lenders, which will provide end consumers with financing options that allows them to pay for products in installments. This could lead to increased customer financing approval rates, decreased cart abandonment and higher sales for merchants.
Risks
Mastercard reported challenging operating conditions in a number of its key markets in its most recent quarterly update. In Europe, consumer confidence is mixed, with Brexit dragging on performance. In Asia, the trade war between the U.S. and China has led to modest growth across the wider region. In addition, weakness in Mexico has contributed to difficult trading conditions in Central and South America. The factors that have contributed to difficult operating conditions, such as the global trade war and Brexit, look set to continue in the short term. They may also impact the company’s near-term performance.
In response, the business is seeking to further diversify its customer base. A key part of this is investing in areas where there is low electronic payment penetration. For example, Mastercard is expanding its exposure to the Middle East and Africa through partnerships with local processor Network International and e-commerce platform Jumia. Mastercard could be in a strong position to capitalize on a pivot from cash and checks to electronic payments across the region.
Outlook
The company is expected to deliver an 18% increase in earnings per share in the next fiscal year. This helps to justify its relatively high valuation as the stock has a forward price-earnings ratio of 36.
In the long run, investments to improve the customer experience through a variety of partnerships, as well as pivoting to new products, could strengthen the company's competitive outlook.
Although there are risks facing the global economy, Mastercard’s expansion into new geographies could catalyze its financial prospects.
While the stock has outperformed the S&P 500 in the last year, further capital growth could be ahead.
Disclosure: The author has no positions in any stocks mentioned.
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