It's been quite the climb up the charts this year for Mastercard (MA 0.31%), as the company has seen its stock price increase more than 40%. From a $189.74 price at the beginning of 2019, the company was trading at $271.19 at the closing bell on September 24. The company's stock is outpacing the S&P 500 almost two-to-one in 2019, and it's grown a remarkable 1,120% since the beginning of 2011.
Mastercard, one of the world's largest payment processing companies, has benefited tremendously from a growing U.S. economy as well as a shift in consumer trends from spending cash to swiping cards -- and, more recently, to mobile payments.
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With widespread predictions of a recession looming, investors are wondering what the future may hold for the company's stock. Still, economic forecasters are seeing good things ahead for Mastercard as consumer spending doesn't appear to be slowing.
Consumer spending is still strong despite softening
Whispers of impending doom in the economy have been circulating globally for more than a year now, but so far, the American consumer hasn't taken heed of the warnings. According to the U.S. Bureau of Economic Analysis, consumer spending in the United States has increased every quarter since July 2016.
At the end of this year's second quarter, consumer spending reached $13.25 trillion, up from $13.10 trillion from the prior quarter and up from $12.91 trillion year-over-year. Not surprisingly, Mastercard's stock has increased on average more than 17% for the last eight quarters.
Those statistics aren't necessarily indicative of future success for payment processors, though, as two-thirds of overall consumer spending is comprised of housing and healthcare costs that are often not charged to a debit or credit card.
The good news, though, is U.S. retail sales have increased each of the last six months. Retail spending was up 0.4% in August, after increasing 0.8% in July. And while August's increase is a far cry from the 1.2% increase in October 2018, 1.5% increase in January, or 1.8% increase March, the good news for retailers is the holiday shopping season is right around the corner.
Even in slower economic times, consumer spending in the U.S. is often much higher in the fourth quarter compared to the rest of the year. If this holds true in 2019, retail sales -- and, as a result, debit and credit card charges -- are likely to increase.
Changing consumer habits should fuel continued growth
Even if an economic slowdown does happen, and U.S. consumers pump the brakes on spending, the changing habits of consumers could continue to push Mastercard and other payment-processing companies forward. That's because of a major shift from consumers paying for goods with a debit or credit card instead of cash.
According to a 2018 study conducted by payment-processing company TSYS, 80% of consumers prefer to make purchases with a debit or credit card, while only 14% prefer to use cash. Debit cards (54%) are still the top choice among U.S. spenders, but companies such as Mastercard issue the debit cards for banks' customers, too.
Quite quickly, payments are moving from plastic to digital, with an increasingly large segment of the U.S. population becoming comfortable making purchases this way. Whether these purchases are done using digital wallets and in apps, or are peer-to-peer payments, most are being processed by a company such as Mastercard.
In its second-quarter earnings call at the end of July, Mastercard reported net revenue of $4.11 billion, an increase of 12.2%. Its net income increased 30.57% year-over-year from $1.57 billion ($1.5 per share) in the second quarter of 2018 to $2.05 billion ($2 per share) this year. Credit card transaction volume increased almost 13%, and debit card transaction volume was up 9% from the first quarter.
Visa (V), Mastercard's main competitor, reported net revenue of $5.84 billion at the end of the second quarter, an 11.5% increase, and net income of $3.10 billion ($1.37 per Class A share), a 33% increase from a year prior.
According to the TSYS study, 23% of respondents made an in-store purchase using a merchant's mobile app recently, while 47% made such a purchase online. The study also found 69% of respondents said they'd make at least half of their in-store purchases over the next two years with their phone.
These changing consumer spending habits, combined with the continued growth in consumer spending overall, is what has research firms such as Moffett Nathanson singing Mastercard's praises. In fact, Lisa Ellis, a partner in the firm, recently sent a note to clients that said there are few stocks other than Mastercard "for which you can have a comparable level of conviction" for roughly 20% EPS growth every year for the next five years.
What does this mean for investors?
Investors in Mastercard have been enjoying the returns the stock has provided them recently. With continued projected growth for the company, now may be a good time for investors to add to their existing position.
For those who don't already own Mastercard stock, it still looks like a beneficial time to jump in the waters. While it isn't expected that Mastercard will overtake Visa for the No. 1 spot on the payment-processor list in terms of revenue, the company is poised to continue growing as debit and credit card payments take over the financial landscape.
