How risky is Mastercard? | The Motley Fool
2020 has been a tough year for MasterCard (NYSE: MA). The sharp drop in travel due to COVID-19 weighed on the results of the digital payment network. Full-year revenue and adjusted earnings per share fell 9% and 17%, respectively. And given that it’s still a high-priced stock — the shares were trading at 54 times past 12-month earnings as of Wednesday’s close — Mastercard could be seen as a risky investment at this point.
Despite the pandemic, however, Mastercard has many advantages working in its favor. For long-term investors, this company is much less risky than it seems at first glance.
Image source: Getty Images.
A (possible) bet on the rebound of the trip
Mastercard is a bet on a possible rebound in travel. While the volume of money moved using its digital network has returned to year-over-year growth (due in part to the rise of e-commerce – more on that below), the slump in cross-border money movement remains the biggest headwind to Mastercard’s revenue results.
|
Period |
Cross-Border Volume Change (Annual) |
Total Gross Volume Change in Dollars (Annual) |
Revenue Variation (Annual) |
|---|---|---|---|
|
Q1 2020 |
(1%) |
8% |
3% |
|
Q2 2020 |
(45%) |
(ten%) |
(19%) |
|
Q3 2020 |
(36%) |
1% |
(14%) |
|
Q4 2020 |
(29%) |
1% |
(seven%) |
YoY = year after year. Source of data: Mastercard.
Clearly Mastercard is recovering its path to revenue expansion, but the lack of global travel is hampering progress. New lockdowns and travel restrictions initiated by many countries have held back the recovery in the last months of 2020. However, the digital payments industry remains a great way to invest in a gradual return to travel. According to new Mastercard CEO Michael Miebach:
We continue to believe that travel will improve, starting with personal travel as border restrictions ease and vaccination efforts expand. We believe business travel will follow. As we’ve said in the past, progress may not be linear, but we believe there is significant pent-up demand for travel. And we continue to expect improvements in the second half.
As of this writing, stocks are trading at the same price as they were just before the pandemic. Suffice it to say, a rebound in travel has been factored into the valuation for next year (hence the high price to earnings multiple of 54). However, as travel returns, it will add to the progress the company has made on other fronts, like online retail.
Bet on a more digital and real-time financial system
As shareholders wait for a gradual easing of the economic effects of the pandemic, Mastercard is a growing business in other areas. The continued expansion of e-commerce in particular is a massive tailwind that will continue long after COVID-19 has ceased to be a major concern. Cardless transactions (think online shopping) have grown by double digit percentages in 2020. Mastercard is constantly recruiting new merchants and partnering with payment providers to make transactions easier and more secure in the new era of digital trade. During the last call for quarterly results, partnerships with the new City Plex digital bank account integrated with Alphabet‘s Google Pay, a new credit/debit offering, payment analytics agreement with Walgreens Boot Allianceand agreements to provide card payment identification services with netflix and Etsy.
Partnerships like this exemplify the nature of Mastercard’s way forward. The world is still highly dependent on cash and legacy digital systems, and Mastercard has many opportunities to recruit new partners into its ecosystem. Next generation payment systems using blockchain technology are also an emerging trend that could benefit the company in the long run. But beyond facilitating the actual movement of digital money, its fintech services are remarkable. Data security, analysis, and the storage and management of payment information go hand in hand with e-commerce, and gains in these ventures often accompany growth in transaction volume.
Mastercard has plenty of cash to use as it seeks new areas for expansion. At the end of 2020, cash and investments on the books totaled $10.6 billion, while total debt was $12.0 billion. Additionally, adjusted free movement of capital was $5.53 billion in 2020 (including the cost of acquisitions), good for a free cash flow profit margin of 36% (or 43% if you exclude the cost of acquisitions). This gives the company enough cash to invest in growth or to buy back shares. (The stream authorization to buy back shares it has $9.5 billion left, or 3% of the company’s current market capitalization.) Simply put, Mastercard is on a rock solid footing as it begins to absorb the early effects of COVID- 19.
In the new digital era that is looming, Mastercard seems poised to return to growth. Of course, its shares are trading at a premium, and a possible rebound in travel spending is factored into the stock’s valuation for the year ahead. However, continued growth in various areas of e-commerce means this leader in digital payments is set to remain a growth story for the foreseeable future. It has its expensive valuation for a reason. For investors who are willing to buy and hold for at least a few years (the longer the better), this Isn’t it so risky an action after all.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.