In the last three years, shares of Mastercard (MA +0.36%) are up just 19% (as of Sept. 26), a rate of return that has lagged both the S&P 500 and the Nasdaq Composite Index. But make no mistake, this has been a wonderful stock to own if we zoom out even further. This business has a successful track record of increasing revenue and earnings.
However, investors are probably wondering what the future holds. If history is any indication, Mastercard will be a larger and more successful enterprise in three years. Let's take a closer look.
The rise of digital payments
In recent years, the total payments volume that Mastercard processed, as well as its revenue and cards in circulation, have all climbed at healthy rates. And this continues a longer-term trend of the same story. Usually, a business is only able to perform this well if there's a powerful tailwind working in its favor.
For Mastercard, as well as its bigger rival Visa, the growth of cashless transactions has been a huge benefit. Perhaps no event over the past decade has accelerated this shift more than the coronavirus pandemic, when consumers discovered that using credit or debit cards was not only safer but much more convenient.
There's still a lot of growth potential. According to data provided by the Pew Research Center, 58% of Americans still use cash for some or all of their transactions in a typical week. Unsurprisingly, that percentage has declined over the years, but it shows that even in the most developed economy in the world, there are still ample opportunities for cashless transactions to gain broader adoption.
Mastercard will get a boost from the popularity of digital wallets, like Block's Cash App, PayPal, and Apple Pay, which make it incredibly easy to use one's card at checkout. Moreover, as online shopping continues taking share from physical retail, the need to transact over long distances makes card payments essential.
Wall Street analysts predict that revenue will increase at a compound annual rate of almost 14% between 2023 and 2026. These would certainly be healthy gains.
NYSE: MA
Key Data Points
Value-added services add diversification
Mastercard's bread-and-butter revenue driver is taking a small percentage fee from every transaction that runs across its network. This lucrative model has resulted in a fantastic business, one that has rewarded shareholders. But the company's other services, like cyber and intelligence, consulting, and marketing solutions, deserve some attention. This segment's revenue represented about one-third of overall company revenue in 2022, a fact most investors might not be familiar with.
Mastercard is already essential to its banking and merchant customers. By focusing on introducing value-added services to the mix, the business will find itself as a truly irreplaceable and mission-critical partner to all stakeholders. That will only help to strengthen its competitive positioning over the next three years.
Expanding the bottom line
Between the second quarter of 2020 and the latest quarter (the second quarter of 2023, ended June 30), Mastercard's diluted earnings per share (EPS) more than doubled. So, not only is Mastercard poised to continue its double-digit revenue growth in the years ahead, based on what I've discussed above, but its earnings are also set to rise rapidly.
That's because the company has proven it can leverage its mainly fixed cost base as it grows. Historically, net income consistently increased at a faster rate than revenue. Mastercard's payments network is extremely scalable, with additional transactions costing almost nothing to process.
Investors will also appreciate management's willingness to use free cash flow to buy back shares. In the past three years, the outstanding share count has been reduced by 6%, an action that can boost the EPS figure.
Mastercard's fundamental performance will likely remain strong as we look ahead, which means the stock has the potential to be a winner.
