Why Mastercard Stock Is a Buy After Q3 Earnings

Mastercard (MA 1.33%) is one of the best known brands in the world, but the stock has significantly underperformed the market over the past year. However, as consumer and travel spending continue to normalize, this payments giant is well positioned to benefit.

In this Backstage Pass video, which was recorded Oct. 29, 2021, Motley Fool contributor Trevor Jennewine shares his thoughts of Mastercard's third-quarter earnings, hitting on a few tailwinds that should be growth drivers for the company.

Trevor Jennewine: Mastercard needs a little introduction. The company is the big third largest payments network in the world. Last year, according to the Nilson report, Mastercard handled about 24% of all card-based purchase transaction. So, another card payments company with enormous scale just like Visa.

The stock is down about half of that percentage point today, so the market was relatively indifferent to the earnings. Let's take a look. Revenue growth of 30%, reached $5 billion dollars in the third quarter. And that was a beat on the top line. Earnings per diluted share came in at $2.44; that was up 62%. That was a solid beat on the bottom line; Wall Street was looking for about $2.19.

Mastercard primarily generates revenue in two ways: as a percentage of the gross dollar volume that's moving through its platform, and also as a fixed per transaction fee for services like authorization, settlement, and clearing. It's important to pay attention to those two metrics. And cross-border volume comes into play, because there's a higher fee assessed for cross-border transactions.

The gross dollar volume was up 21% to about $2 trillion for the quarter. Transaction volume grew 25% to 29.7 billion. And cross-border volume was up 54%. For the quarter as a whole, cross-border volume was still below where it was in 2019; it was about 97 percent of what it was in 2019. But that was primarily due to a weak July. In August, September, and October that number is trending upward, and is now back above the 2019 baseline. Generally speaking, things are moving in the right direction. Consumer and travel spending are ticking upwards.

A few other things I wanted to highlight: The company recently completed the acquisition of CipherTrace. Mastercard has been pretty aggressive in their investments into the cryptocurrency space, and that's what CipherTrace, CipherTrace is an cryptocurrency intelligence company that really helps prevent fraud and protects digital assets. So this is just one more stepping stone and management's pursuit of that industry.

Then, maybe the bigger news, back in September, Mastercard launched its buy now pay later service called Mastercard Installments. This will offer interest-free consumer financing over a period of four installments. Mastercard won't be lending any money, but it's providing its network to banks like Barclays and fintechs like SoFi Technologies. And there's a few other partners that have already signed up to make use of Mastercard installments.

The company noted that the buy now pay later feature tends to boost sales and reduce cart abandonment. They gave the figure 45% uptick in sales with buy now pay later. This is a pretty hot topic or pretty hot area right now. It seems like every company in the financial industry is getting involved in some way or another, so I think this makes sense.

Looking to the next quarter, management is expecting revenue in the low-20% range on a currency-neutral basis. A little bit of a deceleration over the current quarter, but this is actually still stronger guidance than Visa gave yesterday. Visa put its revenue growth in the high- to mid-teens. A little bit stronger guidance and maybe that's why the stock didn't go down as far as Visas did after its earnings. Overall, Mastercard had a solid quarter. They are continuing to make progress in some of the important growth areas, and I especially like that they are getting involved in buy now pay later.