Is Mastercard Stock Overvalued?

Is Mastercard Stock Overvalued? It’s hard to imagine life without a wallet full of plastic, but in the 1940s, credit cards didn’t exist.

Late in the decade, a few banks started experimenting with the concept of paper-based credit slips, but it wasn’t until the 1960s that the Interbank Card Association (ICA) was formed. This group of banks and merchants created a closed circle in which consumers could pay member merchants with cards issued by member banks.

The group expanded, went international, and grew in popularity. Everyone loved the convenience of paying for their purchases with plastic. In the late 1970s, ICA changed its name to Mastercard International, and soon the Mastercard logo was recognizable worldwide. 

Today, Mastercard is accepted in 210 countries and territories, and there are more than 943 million Mastercard credit and debit cards in circulation. An astonishing 234 million of those are owned by United States residents – that’s a card for nearly all of the nation’s 255 million adults. 

Yes, Mastercard is still in second place behind Visa (V) in terms of size and purchase volume, but there is more than enough demand to go around.

Digital payments are rapidly overtaking cash as the primary method of making purchases. The total volume for all card-based purchases is expected to reach nearly $11 trillion in 2024, which is an increase of 35.7 percent over 2019. 

Mastercard stock saw a sizable drop when the market crashed in March 2020, but it has since bounced back – and then some.

While analysts agree that Mastercard is a solid choice for just about any portfolio, it’s beginning to look like this is the wrong time to buy. Is Mastercard overvalued? Should investors hold off on buying this stock?

Why Mastercard Stock Went Up

Mastercard was going strong in the first two months of 2020, but the March market crash hit this stock hard. It bottomed out at $199.99 before increasing slowly. However, it did not recover as quickly as some of its digital payment peers.

Mastercard relies heavily on brick-and-mortar transactions for revenue, and many such stores were closed for an extended period.

In addition, Mastercard relies on cross-border fees which have all but stopped, as there is very little international travel occurring at this time. 

Nonetheless, Mastercard stock did recover by the third quarter, and for a few days, stock prices exceeded the previous 52-week high.

In fact, Mastercard shares increased by approximately 68 percent in the time between the market crash and early December. In November alone, the rise was more than 16 percent.

This increase is linked to investors’ expectations that Mastercard is poised for strong growth as soon as the economy returns to normal. That is to say it is not based on current results, which makes trading shares particularly tricky.  

Mastercard Financials: Net Revenue Down 14%

While you wouldn’t know it from the growth in stock price, Mastercard’s third-quarter results were not especially impressive.

Net revenue was down 14 percent year-over-year, totaling $3.8 billion. Third-quarter net income dropped, too, by a whopping 28 percent. The final number came in at $1.5 billion.

Though net income was down for the quarter, business leaders reaffirmed their commitment to shareholders. They announced an increase in the quarterly dividend, bringing it to $0.40 from $0.33. 

In other good news, the company announced that it saw indications of a return to business as usual in many of the hardest-hit markets. More importantly, Mastercard saw a massive uptick in digital transactions from e-commerce sales.

The increased e-commerce activity is expected to continue after the pandemic ends, so Mastercard is focused on innovation in the digital payment space.

The company intends to hold a leadership position in this area, which gave investors and analysts confidence that the drop in revenue and net income is merely temporary. 

Is Mastercard Valuation Too High?

Mastercard’s valuation isn’t necessarily based on this year’s performance. The company had a very successful 2019, and it has demonstrated its ability to thrive in the midst of economic adversity. When the company reported solid third-quarter results, investors got excited and share prices went up.

After all, industry experts predict that pandemic or no pandemic, Mastercard is on-track to hit a $1 trillion market cap by 2023. 

Mastercard’s current valuation is based on high expectations for future performance – not necessarily short-term returns.

Analysts generally agree that current revenues don’t support the dramatic increase in share prices, and for the moment, Mastercard’s valuation is too high.

Will Mastercard Stock Drop?

It is likely that Mastercard will have ups and downs over the next 12 months, especially since there is potential for market volatility.

Current investors would be well-advised to wait things out, because any drops in stock prices are unlikely to last.

However, from a short-term perspective, now might not be the right time to buy in. Keep an eye out for any corrections in share price and make your purchase when those prices go a bit lower to maximize long-term returns.

Is Mastercard Stock Overvalued? 

The bottom line is that Mastercard is overvalued given its current performance. The company had a difficult year, and its financial results illustrate the strain on revenues.

With that said, no one believes the current slump will be an on-going issue. Analysts agree that Mastercard will return to previous levels of profitability once the pandemic has been extinguished. 

Buying in at today’s premium prices isn’t a terrible move, but it does mean you will wait longer to realize any returns. Most experts suggest holding off on a purchase of Mastercard stock until either the prices are more in line with current financials, or the company’s financial results pick up. 

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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.