Mastercard (NYSE:MA) has done an amazing job lately in making the most of the huge opportunities in the global payments industry. Even though its primary rival remains larger, Mastercard has been taking big strides toward closing the gap. Those following the stock have to be impressed with the progress Mastercard has made in producing the levels of growth necessary to try to catch up to its archnemesis.
Coming into Wednesday's first-quarter financial report, Mastercard investors fully expected that the company would be able to keep growing at a healthy rate. Yet nearly no one anticipated just how strong those growth figures would be, and Mastercard's international exposure helped play a major role in boosting the company's revenue and earnings to start 2018.
With favorable conditions likely to continue, many are optimistic about Mastercard's capacity to sustain its growth rates well into the future.
A big boost for Mastercard
Mastercard's first-quarter results were simply phenomenal. Revenue soared 31%, to $3.58 billion, topping the consensus forecast for the top line by fully $330 million. Net income grew even more sharply, rising 38%, to $1.49 billion, and the resulting earnings of $1.41 per share compared quite favorably to the $1.25 per share that those following the stock were expecting to see.
Mastercard kept firing on all cylinders from a fundamental perspective. Gross dollar volume soared 19%, to $1.42 billion, accelerating in its pace of growth from previous quarters. Switched transaction counts came in at 16.7 billion, sustaining their past growth rate of 17% after adjusting for the deconsolidation of Mastercard's business in Venezuela.
Cross-border volumes measured in local currency jumped 21%, and favorable currency impacts across the company's network lifted overall revenue by about 4 percentage points. Overall card counts remained at roughly 2.4 billion.
There were a couple of concerns about Mastercard on the expense side of the income statement. Adjusted operating expenses rose 35%, outpacing revenue growth and causing operating margin to fall more than a percentage point, to 54.2%. Higher litigation provisions and general increases in overhead expenses were largely responsible for the increase.
Yet $100 million of the figure came from the company's contribution to its Mastercard Center for Inclusive Growth charitable organization. Moreover, with a 9 percentage point drop in income tax rates, Mastercard once again got a huge boost from tax reform, paying $86 million less in taxes despite the much higher pre-tax income.
Mastercard's international business keeps paying off for the company. Gross dollar volume was higher by 28% overseas compared to a 12% rise in the U.S. market. Although currency impacts played a huge role in international outperformance, volumes were higher by 20%, even when measured in local currencies. Similar disparities in purchase volume and cash transactions make it clear that Mastercard's future depends on continued penetration into the global markets.
What's next for Mastercard?
CEO Ajay Banga summed up Mastercard's strategy quite succinctly. "We are investing in areas such as safety and security and our digital solutions to drive long-term growth," Banga said, "with a focus on delivering simple and secure transactions across all channels." The CEO pointed to record revenue and earnings for the quarter as evidence of solid execution.
The pace of stock buybacks at Mastercard also emphasized the commitment that the payments giant has in returning capital to shareholders. Mastercard bought back 7.9 million shares during the quarter, spending $1.4 billion in the process. Just in the first month of the second quarter, the card giant added another 3.5 million shares of buybacks, spending more than $600 million and leaving the company with about $3.3 billion left in authorized repurchase capacity.
Global economic conditions have been quite strong, and the weakening of the U.S. dollar could be a tailwind to growth for Mastercard well into the future. In the long run, currency fluctuations might well cancel each other out, but the company's emphasis on tapping into emerging markets where electronic payment transactions are only in their infancy could pay big dividends in future years.
Mastercard investors liked what they saw, and the stock rose 4% in pre-market trading following the announcement. Growth rates like what the company saw this quarter won't happen every time, but overall, Mastercard is on the right path to sustain impressive growth for the foreseeable future.