Please ensure Javascript is enabled for purposes of website accessibility

Has Mastercard's Stock Gone Too Far, Too Fast?

By Anthony Di Pizio - Updated May 5, 2021 at 12:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors have built strong growth expectations into the payment giant's share price, but they may have overshot.

There are few companies in the world tied to consumers' financial health the way Mastercard (MA -1.50%) is. It processes an incredible $6.3 trillion worth of transactions each year, and therefore can be really sensitive to economic shocks that result in less consumer spending. The COVID-19 pandemic was probably as significant a shock as Mastercard could expect to see, but looking back, the company didn't perform too badly.

With a market capitalization of $372 billion at Wednesday's prices, Mastercard's stock trades near all-time highs. However, its recent gains owe more to multiple expansion than earnings growth. Right now, the stock trades at a significant 58 times trailing-12-month earnings. That's a little skewed because of the effects of the pandemic -- but the stock is richly priced based on expected earnings for 2022, too. If you're a Mastercard investor, what should you make of this valuation?

Young woman holding a smartphone and credit card, thinking

Image source: Getty Images.

The everything business

Investors are clearly willing to pay higher valuations for Mastercard as time progresses, and perhaps one of the reasons is because it has never been truly disrupted. The reality is, it's integrated with almost every bank in the world, and they have issued over 2.8 billion of the company's cards to consumers as of December 2020. It will be extremely difficult for new entrants to unseat such a dominant position, although new direct payment technologies like "Buy Now, Pay Later" are giving it a shot. Ultimately, the main competitor it has is Visa

Year

Total Mastercard Payment Volume

2017

$5.2 trillion

2018

$5.9 trillion

2019

$6.5 trillion

2020

$6.3 trillion

Data source: Company filings.

Gross payment volume was growing nicely until the pandemic struck, although the effects were probably a lot smaller than expected in the early moments of 2020. Payment volume has returned to growth, though, with the first-quarter 2021 earnings report showing $1.7 trillion, up 8% compared to the same time last year. If that level remains consistent throughout the year, Mastercard stands to grow compared to both 2020 and its peak in 2019.

Emerging financial technology companies like Affirm have tried to bypass both Mastercard and the big banks, integrating directly with online merchants to facilitate payments (plus providing financing to customers). While very popular with consumers, this model so far has failed to generate meaningful profits, and some players -- like Australian company ZipPay -- have even partnered with Mastercard to deliver ''digital credit cards'' for their customers. So even as disruptors enter the payments scene, it turns out they greatly benefit from Mastercard's services and become customers as much as competitors. 

Truly global

The U.S. makes up just 31% of Mastercard's total net income -- it's a truly global business. Over $4.3 billion of the company's $6.4 billion is derived worldwide, so it puts the effects of the pandemic into perspective. For the full year 2020, Mastercard's cross-border transaction volume declined by a significant 29%, as less consumers could travel on account of border closures around the world.

In the first quarter of 2021, the company reported cross-border volumes down 17%, which is an improvement, but still markedly suppressed. The issue going forward is whether consumers will be able to move around the world during the U.S. and European summer -- and more importantly, whether they actually want to. Vaccination programs are ramping up, but countries like Italy are still under substantive lockdowns domestically, and are only just preparing to welcome tourists later in May.

With no opportunity to prepare or plan summer holidays, it remains to be seen if popular destinations will attract tourists, which would really impact Mastercard's ability to climb out of the cross-border volume crater left by COVID-19. Losing another summer could really stifle Mastercard's hopes for an earnings rebound. 

The bottom line

Mastercard has been consistently trading at an earnings multiple near 40, which is understandable given the powerful growth rate in earnings per share. 

Calendar Year

Earnings Per Share (Fully Diluted)

Share Price*

Multiple*

2017

$3.65

$168.70

46.2

2018

$5.60

$211.05

37.7

2019

$7.94

$316.50

39.9

2020

$6.37

$316.55

49.7

As of May 5, 2021

 

$375.00

57.7 (2020 earnings)

2021

$7.92 (estimate)

$375.00

47.3

2022

$10.44 (estimate)

$375.00

35.9

Data source: Calculated by author using company filings. *Share price and multiple captured on Jan. 31 following the respective full-year earnings reports. Estimated 2021 and 2022 earnings from Yahoo! Finance.

Looking at 2021 and 2022 estimates, the company seems fairly valued for the next two years unless it manages to blow out analyst expectations. This leaves some risk to the downside if it fails to meet them, so investors might be considering their risk versus reward when buying the stock at these levels. 

Mastercard's not the only payments provider with a slightly rich valuation, and this is likely the effect of ultra-low interest rates buoying the entire sector as the cost of money remains suppressed. 

Visa trades at 48 times earnings for the past 12 months, and 37 times consensus estimates for the next 12 months. Visa is a bit bigger than Mastercard, with a roughly $508 billion market cap and $11.6 trillion in gross transaction volume in 2019 (pre-COVID), with 3.4 billion cards issued. However, the companies operate very similar business models.

American Express, while in the same business as Visa and Mastercard, operates with a very different model. It issues cards directly to consumers rather than solely to third parties, and it also provides credit products. While still a large company at $125 billion, it attracts a lower current earnings multiple of 25 times trailing earnings and just 23 times forward estimates. The market typically attributes higher risk to finance companies, as they could pose significant downside during an adverse credit event. 

Looking ahead

Considering the historical valuation of Mastercard, and the fact that it seems close to fully valued through 2022 (assuming earnings estimates prove accurate), investors may want to think about the potential upside versus the opportunity cost of putting money elsewhere. While interest rates are low, which has boosted consumer spending, they could rise as the broader economy heats up.

For the company to deliver meaningful share price growth over the next two years, it might need to materially beat analyst expectations on earnings, through organic growth or increased market share. Without that, the stock could stagnate, and investors would need to be patient.

American Express is an advertising partner of The Ascent, a Motley Fool company. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$352.16 (-1.50%) $-5.35
Visa Inc. Stock Quote
Visa Inc.
V
$213.32 (-1.18%) $-2.55
American Express Company Stock Quote
American Express Company
AXP
$157.28 (-0.15%) $0.23
Affirm Holdings, Inc. Stock Quote
Affirm Holdings, Inc.
AFRM
$34.90 (4.49%) $1.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.