Is Mastercard Stock A Buy?

Mastercard Inc (NYSE:MA) is an American financial institution with a global footprint. It created a large payment processing infrastructure that seamlessly connects retailers, banks, and consumers for fast, secure financial transactions.

While it trails rival Visa Inc (NYSE:V) in transaction volume, it has just as large of a network and market acceptance. However, the economy is heading for turmoil, and the company is losing market share to fintech competitors ranging from PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) to cryptocurrencies. So, is Mastercard stock overvalued?

It’s also facing scrutiny in Europe, which wants to remove itself from dependence on American financial corporations. This could put pressure on the company’s shareholders, who just got used to a consistently raised dividend that reached $1.60 in 2020.

That is only 0.47 percent based on a 47.57 percent P/E ratio. Let’s dive into Mastercard to figure out if it can maintain its $340+ billion market cap in 2021.

Why Mastercard Stock Went Up

Mastercard a critical part of the global payment infrastructure, so it was largely unbothered by Covid-19.

Although retailers felt a squeeze with changing consumer purchase habits during the lockdown, consumers still spent money.

Mastercard has over 2.2 billion payment cards bearing its logo around the world, and they’re accepted by over 35 million merchants in over 200 countries.

This led to them collecting $3.26 billion in revenues for the quarter ending June 30 and $3.98 billion for the quarter ending March 31. While this is still lower than previous years, they still had enough infrastructure in place to handle the problem.

Besides ecommerce, consumers largely turned to contactless payment options, which saw a 37 percent increase when retailers reopened over the summer.

The travel industry was the biggest hit for the company, as nearly a quarter of all leisure and hospitality jobs were lost during the pandemic.

This accounted for 36 percent of job losses across all industries and points to the over-40-percent revenue losses in the industry in 2020.

But service-based spending (i.e. on cybersecurity, cloud computing, and other services necessary for remote work and school) increased to help the company make up for the losses.

Here’s a look at the company’s financial position in 2020.

Mastercard Financials Expected To Bounce Back?

According to Mastercard’s second fiscal quarter 2020 earnings statement, net revenue was $3.3 billion for the quarter, a drop of nearly 20 percent from the $4.1 earned in the same quarter of 2019.

Operating expenses were $1.6 billion, while operating income was $1.7 billion. This led to a $1.4 billion net income for the quarter, versus $2.0 billion in the same quarter of 2019.

Still, the company paid $401 million in dividends to shareholders and resumed its share repurchase program by the end of the second quarter.

Gross dollar volume is down 10 percent and cross-border volume (which is an important revenue driver for the company) is down 45 percent because of the travel restrictions.

It still has $5.9 billion of share buyback authorizations, and it plans to continue with that effort throughout the rest of the year.

For the first half of 2020, Mastercard generated $7.3 billion in net revenue, versus $8.0 billion in 2019. This is a strong indicator that the company is adjusting well to the new economy.

Still, there’s no denying Mastercard faces obstacles over the coming years, especially outside the U.S., as the geopolitical climate heats up among escalating trade wars.

The company needs to work hard to expand its mobile and digital reach, while fighting off competitors coming from all directions. This leaves some analysts fearing the stock may not be able to sustain its current market value.

Is Mastercard Valuation Too High?

As of the fourth quarter of 2020, Mastercard has a market cap over $350 billion with a P/E ratio of 48.94. Its annual dividend yield is 0.45 percent, or $0.40 per share in 2020.

Share prices are trading in the $350 range, with a 52-week high of $367.25 and low of $199.99 during the Covid-19 pandemic.

If you invest in Mastercard right now, you’re betting on it continuing to grow past its all-time high value. Its market cap is currently over 20x its annual revenue, and the company is facing a few problems.

First, there’s the European Payments Initiative that is working to free Europe from its reliance on American-based financial networks like Visa and Mastercard.

Should this initiative go through, it’ll make it tougher for the company to compete across the continent. There’s also increasing competition in the digital payments space from legacy companies like Visa and American Express, digital companies like PayPal and Square, and cryptocurrencies and their wallets.

That’s just the American competition, and there’s regional competitors popping up in Asia, South America, and more.

Will Mastercard Stock Drop?

Mastercard stock is at risk of losing value should the economy drop. However, it proved during the coronavirus pandemic that it’s capable of sustaining its business.

So long as core profit streams are held, at least in the U.S., the company will be able to weather rough economic times, but we don’t know how rough things will get.

With tourism and travel still severely limited heading into 2021, there’s no guarantee Mastercard won’t continue dropping in profits.

It could find itself on the wrong end of European legislation that puts a chokehold on potential profits. This will lead to drastic measures needed to maintain its historical oligopoly on the payments market.

Is Mastercard Stock Overvalued? The Bottom Line

Mastercard is a legacy payment processor that, along with Visa, is a worldwide leader in its industry. That industry was shaken up by a push to virtual payments and hits to the travel industry though.

While the company’s market value shows historic highs, its profits already dropped by over 10 percent for the year. Things could get even worse if European legislation takes a chunk out of revenues coming from the region.

Still, the company hasn’t stopped paying dividends, and it has the money to aggressively expand, which it’s been doing throughout the tail end of 2020.

By 2021, Mastercard will have new revenue streams, but it’s not clear if it’ll be enough to satisfy investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.