MasterCard's Strategic Expansion And Diversified Investments Signal A Bright Future In Digital Payments

Key Takeaways

• Expansion in digital payment technologies and significant growth in tokenized transactions indicate Mastercard's strong positioning in the shift towards digital payments.
  
• Strategic international partnerships and investments in new payment flows suggest avenues for diversified revenue streams and market share expansion.
  
• Competition, regulatory changes, economic uncertainties, reliance on technology, and currency fluctuations could impact MasterCard's market share, earnings, and growth.

Catalysts

A technology company, provides transaction processing and other payment-related products and services in the United States and internationally.

• Strong cross-border volume growth of 18% year-over-year underscores the robust demand for international travel and transactions, which is expected to drive revenue growth.
  
• Expansion of digital payment solutions and technologies, like contactless and Tap on Phone capabilities, positions Mastercard to capitalize on the accelerating shift to digital payments, directly impacting transaction volumes and revenue.
  
• Significant growth in tokenized transactions (over 50% year-over-year), with potential for further expansion as only about 1 in 4 transactions on the Mastercard network are tokenized, indicating opportunities for increased revenue through enhanced security and consumer experience.
  
• Strategic deals and partnerships in various regions, including agreements with Banco Bradesco and exclusive partnerships in the Middle East and India, are poised to expand Mastercard’s market share and drive revenue growth through increased card issuance and transaction volumes.
  
• Investment in new payment flow areas such as commercial payments, disbursements, and remittances, highlighted by growth in transactions and expansions into new markets, suggests potential for diversified revenue streams and enhanced margins.

Assumptions

• Analysts are assuming Mastercard's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 46.4% today to 48.8% in 3 years time.
• Analysts expect earnings to reach $17.9 billion (and earnings per share of $20.67) by about October 2027, up from $12.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.6x on those 2027 earnings, down from 37.4x today. This future PE is greater than the current PE for the US Diversified Financial industry at 15.8x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

Risks

• Intense competition within the payments industry could pressure MasterCard's market share and margins, potentially impacting its revenue and net margins.
  
• Regulatory changes or increased scrutiny in various regions, especially concerning interchange fees or operational mandates, could lead to increased costs or fines, affecting MasterCard's earnings.
  
• Global economic uncertainties, including inflation rates and geopolitical tensions, could impact consumer spending patterns, potentially reducing transaction volumes and affecting revenue.
  
• The reliance on technological advancements for growth exposes MasterCard to risks related to cybersecurity breaches or failures in innovating adequately, which could harm its reputation and financial performance.
  
• Fluctuations in foreign currency exchange rates could impact MasterCard's cross-border transaction revenues and operational costs, affecting its net margins and earnings.

Valuation

• The analysts have a consensus price target of $521.96 for Mastercard based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $591.0, and the most bearish reporting a price target of just $456.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $36.8 billion, earnings will come to $17.9 billion, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 6.6%.
• Given the current share price of $496.38, the analyst's price target of $521.96 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.