Shares of payments giant Mastercard (MA) are down about 24% from their 52-week high as a collection of headwinds hovers over the stock. Mastercard has been trending lower since the summer, and news of a new variant of COVID-19 emerging on Black Friday added to the decline.
However, zooming out, there is a lot to like here, and I am bullish on the chance to buy this blue-chip payment and financial technology player at a discounted price.
Mastercard is a play on secular trends like the transition from cash payments to electronic payments globally. It is working towards launching its own buy now pay later solution, and it has an expanding reach within cryptocurrency. Sell-side analysts see 44% upside in shares of Mastercard from here. (See Analysts’ Top Stocks on TipRanks)
Cryptocurrency Partnerships
While cryptocurrency is viewed as an existential threat to legacy financial players, Mastercard has immersed itself in the space and partnered with a wide array of crypto innovators.
Mastercard is partnering with crypto brokerage Voyager Digital (VYGVF) to offer a crypto debit card that will pay cashback rewards in USDC stable coin. The company has similar partnerships with Gemini, BitPay, and Uphold.
Shares of crypto exchange Bakkt (BKKT) surged on an announcement that it was partnering with Mastercard to offer crypto solutions to Mastercard’s customers. In September, Mastercard acquired CipherTrace to expand into cybersecurity and fraud protection for the crypto industry.
Clearly, cryptocurrency players and other fintech companies view Mastercard as a valuable partner and want to work with the company to access its infrastructure and global network of customers and merchants. Mastercard isn’t content to rest on its laurels and let itself become disrupted. It is partnering with the disruptors and gaining exposure to an exciting new asset class.
Buy Now Pay Later Is Not a Threat
The prevalence of buy now pay later (BNPL) offerings now available to consumers are also frequently cited as a threat to Mastercard. However, customers typically make the installment payments on their debit cards, so companies like Mastercard and Visa (V) are still generating fees.
In many ways, it is actually a net positive for Mastercard because the customer is now making payments throughout a series of transactions instead of just one transaction, so Mastercard is generating more fees each time.
Additionally, Mastercard discussed rolling out its own BNPL solution in 2022 at its analyst day. This offering will allow Mastercard to generate a fee on the initial BNPL purchase as well as the fees mentioned above on each subsequent payment.
Wall Street’s Take
Analysts uniformly view Mastercard as a Strong Buy. All 11 analysts covering the company have a Buy rating on it, and the average Mastercard price target of $441.09 indicates 44% upside potential from current levels.
The highest price target on the Street, $494, implies over 61% upside from here. Furthermore, even the lowest price target of $403 would represent a nearly 32% gain from the current price of $306.
Valuation and Shareholder Returns
While shares of Mastercard are not cheap, trading at 29x next year’s consensus earnings, they are not overly expensive, and this multiple could come down over time as more international travel resumes and the company’s earnings increase.
Mastercard increased its dividend by 11% this week, bringing its forward payout to $1.96 per share. This indicates a forward dividend yield of 0.64%. While this is likely not enough to attract income-oriented investors, it is a step in the right direction.
Also, MA increased dividends by 10% in December 2020, during a year when many other companies cut their dividends. It is likely that more dividend raises will come in the future.
Mastercard has also repurchased $4.6 billion worth of shares in the first nine months of this year and is authorized to repurchase another $8 billion as part of its new buyback program.
Looking Ahead
Travel and normal commerce will eventually resume. Things that look like threats on the surface like cryptocurrency are actually opportunities for Mastercard as it partners with the companies working in this space.
Investing in Mastercard is also a play on global GDP growth and powerful secular trends like the ongoing transition from cash payments to electronic payments.
At its analyst day, Mastercard estimated that $20 trillion out of $45 trillion in total consumer payments are carded, meaning that there is plenty of headroom for long-term global growth in this area.
The company is also pursuing growth in segments like Consumer Bill Pay, B2B payments, and Remittances, all of which currently make up less than 2% of current revenues each.
Given these factors and the recent sell-off, I view Mastercard as a Buy and believe that shares will perform well in the years to come.
Disclosure: At the time of publication, Michael Byrne did not have a position in Mastercard. He has a position in Voyager Digital, which is mentioned in this article.
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