Payment Processor giant Mastercard (NYSE:MA) is not too far away from its all-time high near $400, and the stock has returned 98% to its shareholders over the past five years. Now, the question is, is there room for further returns? I believe Mastercard will continue to benefit from the secular growth trends in the global digital payments industry, and I’m bullish on the stock. Being the market leader with strong fundamentals, it should continue to report impressive revenues and earnings profitability over the long term.
Strong Industry Fundamentals
With the boom of the E-commerce economy over the past decade, the credit card industry has seen humungous growth. Credit card usage has got a further boost from persistently growing inflation and restricted consumer budgets.
Interestingly, Credit card balances were flat in the first quarter of 2023 at $986 billion, according to the Federal Reserve Bank of New York. This is in sharp contrast to the usual credit card balance declines seen in the first quarter of each year.
Mastercard ranks as the second largest credit card network in the U.S. Further, it has successfully grown its network over the past decade. For instance, the number of cards issued by Mastercard grew from 1.2 billion in 2012 to 2.7 billion in 2022.
Mastercard has managed to consistently grow its revenues further driven by acquisitions made over the years. Additionally, Mastercard has a significant international footprint that further adds to its revenue streams.
A look at Mastercard’s earnings and revenue history below gives a clearer picture of its growth.
Revenues have grown at a compound annual growth rate (CAGR) of over 15% and have more than doubled over the past six years from $10.7 billion in 2016 to $22.2 billion at the end of December 2022.
More importantly, earnings have grown in tandem, registering a CAGR of 17.8% over the same period. Earnings have also more than doubled from $4.1 billion in 2016 to $9.3 billion in 2022. On top of that, the company has maintained a high level of profit margins over the years, rising to 44.7% in 2022 versus 37.7% in 2016.
In Q1 2023, adjusted revenues grew 12% year-over-year (15% ex-currency), which is impressive. Driving the revenue increase was a 33% increase in the cross-border volume, a 15% increase in gross dollar volume, as well as a 21% rise in the switched transactions.
Recent Bill Threat Unlikely to Materialize
Now, let’s talk about investors’ concerns over the new bill that could have a dreadful impact on the revenues. Earlier this month, shares of credit card network companies like Visa (NYSE:V) and Mastercard tanked after news that a new bill could be passed. The bill, if passed, could increase competition among credit card network companies. In a bid to promote healthier competition among processing networks, the newly-proposed legislation could empower merchants to process credit cards across different networks.
Currently, it is mandatory to process payments through the same network as the card issuer itself. However, according to the proposed bill — the Credit Card Competition Act — merchants will be able to route payments through other networks.
For instance, merchants will be able to process payments from a Mastercard credit card via another processor different from Mastercard. It could be any of its competitors, including Discover Financial (NYSE:DFS) or American Express (NYSE:AXP). Eventually, this could reduce the fees paid by the merchants to card companies like Mastercard.
This could pose a significant threat to credit card processing fees, a major source of revenue for companies like Mastercard. However, it is to be noted that several similar attempts have been made in the past to legalize such proposals, but they have not been successful.
One of the possible reasons could be that the bill, if passed, could increase security risks. The new proposal comes with many complications and the likelihood of it becoming law is very low, in my opinion.
Is MA Stock a Buy, According to Analysts?
As per TipRanks, the Wall Street community is clearly optimistic about Mastercard stock. Overall, the stock commands a Strong Buy consensus rating based on 20 unanimous Buys. Mastercard stock’s average price target of $434.47 implies 15.1% upside potential from current levels.
Its Valuation is Reasonable
In terms of its valuation, Mastercard is trading at a discount to its own five-year historical P/E average. Presently, Mastercard is trading at a P/E ratio of 35.5x, reflecting a 10% discount from its five-year average of 41x. For the sake of comparison, its biggest competitor Visa is currently trading at a P/E ratio of 31x.
Notably, both stocks are trading at a significant premium to the industry average. However, I believe the premium versus peers is justified given the strong fundamentals and earnings growth.
Takeaway: Consider Mastercard Stock
The global digital payment world will continue to grow tremendously in the coming years. According to statista.com, the total transaction value in digital payments is expected to grow at a compounded annual growth rate (CAGR) of 11.8% over the next four years to reach $14.78 trillion by 2027.
With that, market leaders like Mastercard should continue to report substantial growth. This gives me confidence that Mastercard will continue to deliver impressive revenues and earnings growth like it has in the past. I am therefore bullish on the stock.
