Payments-processing giant Mastercard Incorporated MA is currently trading at a premium valuation. Its forward earnings multiple of 31.07X significantly exceeds the financial transaction industry average of 24.01X. In comparison, competitors like Visa Inc. V and American Express Company AXP trade at more modest forward P/E ratios of 26.55X and 19.61X, respectively. This premium reflects the market's confidence in Mastercard's growth potential.
Zacks Investment Research
Image Source: Zacks Investment Research
However, such a high valuation warrants a closer examination of Mastercard's performance, operations, growth potential and market conditions. Careful analysis is crucial to determine whether this premium is justified or if waiting for a more attractive entry point might be wiser.
MA’s Price Performance
Over the past year, Mastercard's stock has gained 18.9%, aligning with the industry average. It outpaced Visa's 16.6% gain but lagged behind American Express' impressive 66% surge and the S&P 500 Index’s broader 23.6% return. These results highlight Mastercard's steady, albeit not market-leading, performance.
One-Year Price Performance: MA, V, AXP, Industry & S&P 500
Zacks Investment Research
Image Source: Zacks Investment Research
MA’s Growing Operations
Mastercard continues to deliver robust growth in processed transactions and gross dollar volume, serving as key drivers of its revenue expansion. In 2022, 2023 and the first nine months of 2024, processed transactions grew 12.1%, 13.9% and 11.5%, respectively, while gross dollar volumeincreased 6%, 10.3% and 7.8% year over year.
Mastercard reported notable year-over-year growth in its Domestic Assessments, Cross-Border Assessments and Transaction Processing Assessments during the first nine months of 2024. Additionally, its Value-Added Services and Solutions segment showcased strong growth, reflecting the success of its diversification strategy.
Mastercard's digital strategy and expansion in emerging markets like Southeast Asia and Latin America further support its long-term growth potential. These efforts are particularly significant in offsetting the revenue gap left by its withdrawal from Russia. With many underbanked populations in these regions, Mastercard is well-positioned to capitalize on untapped opportunities and strengthen its global presence.
MA to Seize Opportunities
Mastercard is strategically positioned to tap into emerging growth opportunities, leveraging its strong cash reserves to drive both organic expansion and strategic acquisitions. The company's investments and global partnerships reflect its commitment to broadening its network and sustaining its leadership in the payment industry. These efforts have notably contributed to its cross-border volume growth.
Thanks to its cash-generating abilities and balance sheet strength, it announced a new share buyback program of $12 billion last month, which will become effective after completing its previously announced $11 billion program. It also announced a 15.2% increase in its quarterly cash dividend to 76 cents per share from 66 cents paid out earlier.
The company’s focus on cutting-edge technology further solidifies its position in the rapidly evolving financial ecosystem. By prioritizing cybersecurity and data analytics, Mastercard aligns itself with the increasing global demand for secure and efficient digital solutions.
As economies continue their shift toward digital transactions, Mastercard is well-prepared to harness this trend. The decline of traditional payment methods and the surge in digital payments provide a fertile landscape for the company to leverage its global network and expand its value-added services business.
Encouraging Estimates for MA
The Zacks Consensus Estimate for Mastercard’s 2024 and 2025 EPS implies an 18% and 12.4% uptick, respectively, on a year-over-year basis. The earnings estimates remained stable over the past month. Also, the consensus mark for 2024 and 2025 revenues suggests an 11.8% and 12.2% increase, respectively.
The company beat earnings estimates in each of the past four quarters, with an average of 3.2%. This is depicted in the figure below.
Despite its strong position, Mastercard faces several headwinds:
Adjusted operating expenses have been on an upward trend, growing 10.7% in 2022, 10.5% in 2023, and 9.9% during the first nine months of 2024. Additionally, increasing rebates and incentives — a contra-revenue item — are likely to weigh on net revenue growth. In the third quarter of 2024 alone, this metric rose 17% year over year due to new and renewed deals.
Mastercard recently reached an agreement to settle a collective London lawsuit related to card fees, which was brought on behalf of British consumers. Per reports, the company also settled a pay bias lawsuit, agreeing to hire consultants to audit pay practices and an industrial psychologist to evaluate its “career ecosystem.” These lawsuits and settlements add to its costs and may impact reputation management.
The Credit Card Competition Act of 2023, designed to increase competition and lower merchant costs in the U.S. market, poses a significant risk. If passed, it could disrupt Mastercard’s and Visa’s current dominance outside of the Eastern Hemisphere, where UnionPay leads. This legislation could slow growth in the United States, where both companies maintain a duopoly.
The potential impact of shifting political dynamics in the payments space will likely become clearer in the coming weeks as the President-elect Donald Trump takes office on Jan. 20.
Conclusion: Hold MA Stock for Now
For current investors, Mastercard’s robust cash position, operational resilience and growth prospects make it a strong hold. However, for potential buyers, exercising patience may be wise. The stock’s premium valuation, rising costs and regulatory challenges warrant caution, especially as it trades just 5.3% below its 52-week high of $537.70, offering limited upside in the near term. Monitoring the consumer spending environment and Mastercard’s upcoming earnings report later this month could provide clearer signals for future investment decisions.
Mastercard currently has a Zacks Rank #3 (Hold), reflecting a neutral outlook. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
