The stock market is having a pretty good year overall. The S&P 500 is up about 23% year to date as of Dec. 14, and 2021 is on pace to be one of the best years in the past decade. But value stocks have led the way, for the most part, bouncing back from the pandemic-induced recession of 2020. The financial sector, in particular, has been strong this year, but one segment of the sector, credit card and payment companies, has not.
Payment companies had robust gains in 2020, as more people were forced to embrace digital and contactless payments due to the pandemic. Mastercard (MA 0.38%), for example, saw its stock price increase over 20% last year. But this year, the stock is down about 3% -- with all of the losses coming in the second half of the year. Since mid-July, Mastercard is down about 12% and is currently trading at about $343 a share. Here's why it's a good time to buy and hold this growth stock.
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Mastercard is well-positioned to grow
Mastercard is part of a duopoly in the credit processing space, as it and Visa basically own the market. There are other competitors, like American Express and Discover, but they are smaller and have different business models, in that they loan the money and collect interest as well as fees. Mastercard and Visa aren't lenders, so they basically make all of their income on swipe fees -- fees from merchants and users every time a credit card is used on their massive networks. It's a great business model that allows Mastercard to rake in tons of revenue with little overhead and no credit risk.
But as the payment landscape is rapidly changing, there is growing competition from buy now, pay later (BNPL) companies, as well as digital payment providers like PayPal and Block (formerly known as Square).
But the company remains strong, coming off a quarter where net revenue jumped 30% to $5 billion and net income climbed 59% to $2.4 billion, or $2.44 per share. Gross dollar volume (GDV) jumped 20% while cross-border volume increased 52% and switched transactions rose 25% year over year. Testament to its efficiency, Mastercard has a ridiculous 127% return on equity, which is unusually high, and a similarly high operating margin of 53.6%.
One of the key advantages that Mastercard has is its abundance of cash. The company has $6.4 billion in cash and cash equivalents, and that's after making several acquisitions, including open banking firm Aiia, cryptocurrency intelligence company CipherTrace, and Latin American bill pay fintech Arcus, just in the past few months. The high margins and abundance of free cash flow also let the company invest to stay competitive. It recently launched a BNPL service called Mastercard Installments, which lets customers pay in interest-free installments.
Its other major advantage is a massive global network that allows it to quickly scale up these new services and features. So, while money and payments are changing, Mastercard appears to be in a good position to navigate and grow.
A good time to buy
If things are so great, why has the stock price dropped this year while the economy is growing and the S&P 500 is up 23%? There are a few factors at work here. One, the market seemed to have reacted negatively to all credit card and payment companies this fall on both inflation concerns and worries about the new omicron variant, as both could potentially slow economic growth.
Another reason is that Berkshire Hathaway founder and CEO Warren Buffett trimmed his positions in both Visa and Mastercard, and that can have the effect of moving markets. Buffett only sold about 6% of his company's Mastercard shares, so he still has a big chunk of it in his portfolio.
The recent sell-off has brought the price of this growth stock down a little bit, making it a good time to buy. The factors that sank the stock price are not long-term concerns, and while the company is facing new and growing competition, it seems well-positioned to continue to thrive in the world of digital payments.
The consensus estimate for Mastercard among Wall Street analysts is a 25% gain over the next 12 months to $430 per share. If you are thinking of adding this stock to your portfolio, now is a good time to do so.
