August 12, 2022

Mastercard Stock: More Than A Payment Company (NYSE:MA)

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Investment Thesis

Mastercard (NYSE:MA), in recent years, has emphasized growing its services segment. The growth has separated Mastercard from Visa (V) and will generate greater margins. The continuous effort to grow these services will induce higher margins, more customers, and increased profits. Currently, the market is underpricing this long-term growth potential. With Mastercard being undervalued and strong growth in mind, I would consider it a strong long-term buy.

Business Overview

Mastercard is a technology company that operates in the global payments industry, connecting consumers, merchants, and financial institutions. At its core, it enables electronic forms of payments as an alternative to cash and checks. Mastercard is the second-largest payment processor, processing nearly $6 trillion in purchases in 2021. Mastercard generated $18.8 billion in net revenue produced from four segments: Domestic Assessments (27%), Cross-Border Volume Fees (16%), Transaction Processing (36%), and Other Revenues (21%).

Mastercard makes the bulk of its revenue from processing payments through “payment rails.” These operate similar to tolls, where transactions that pass through the merchant or consumer are charged small fees. These fees – ranging from 1.35% to 3.25% – are charged based on the gross dollar volume (GDV) of account holder activity. Gross dollar volume represents the aggregated dollar amount of purchases made and cash disbursements obtained.

Mastercard Payment Rails Breakdown

Mastercard 10k

The company’s main competitors include Visa, American Express (AXP), and Discover (DFS). American Express and Discover offer credit cards directly to consumers, differing from Mastercard and Visa, which offer them through banks and third-party providers. This gives Mastercard and Visa a near duopoly over the payment processing market.

Mastercard Services

Mastercard services make up 35% of net revenue and have increased 118% over the past 5 years. This revenue comes from services that enhance transactions and data security, leverage data to improve customer decision-making, and strengthen customer engagement with their clients. The services segment can be broken into Cyber Intelligence (57%), Data and Services (35%), and others (6%). These services are offered separately or in conjunction with Mastercard’s payment network.

Value-Added-Services Revenue Growth

Services Revenue Growth (Bloomberg/ 10k)

The main profit driver for services is their leverage of Mastercard’s payment network. This network handles 110 billion transactions and reaches 220 countries. Leveraging this data Mastercard can predict payment trends, protect clientele, generate customers, and produce solutions.

Currently, Mastercard’s service segment has over 2,200 clients in +70 global locations. The company also announced the hiring of 500 new Data and Services employees, increasing its workforce to nearly 2,500 employees working on creating new solutions. These employees will have access to over 600 patents and 16 billion API calls. This shows management’s emphasis on growing its services platform.

Future Growth Opportunities

Mastercard has had great growth in the past and is continuously outpacing the market but as it grows larger it will be difficult to continue this strong growth using previous methods. For this reason, management has begun to focus their attention on innovations in the data analytics and service markets. These markets create higher margins and generate more growth than the existing credit card market.

As I stated earlier, Mastercard’s service revenue grew nearly 30% to $6.2 billion in 2021. This large increase is only the beginning. Mastercard has joined prominent industries such as Data Analytics as a Service, Open Banking, Cyber Security, and Identification Verification. Mastercard could soon become a major influencer in these industries by leveraging their payment solutions.

Looking into this more closely, Data Analytics as a Service has seen strong short-term growth that will continue over the long term. Since partnering with Experian (OTCQX:EXPGF) and McDonald’s (MCD), Mastercard’s Test & Learn, a data analytics software, has been growing quickly. It has returned nearly a 67% ROI for clients which is higher than other peers. Looking forward, I believe that Test & Learn could double in size with the integration of Dynamic Yield. This integration has seen success at some McDonald’s chains and could be fully integrated in early 2023.

Test and Learn System


The service’s largest segment by revenue is cyber security. This industry has become very apparent recently with the cyber-attacks during Ukraine’s war with Russia and the need for security will only continue moving forward. Mastercard should be able to benefit greatly from this rise in the need for security. They have already benefited from fintech companies moving more banking data online and will benefit even more when cryptocurrencies become more apparent. Having proven solutions for both situations, Mastercard could be at the forefront of cyber security.

Mastercard’s fastest-growing industry would be Open Banking. Since acquiring both Aiia and Finicity, Mastercard has offered solutions to 15,000 different financial institutions in both the U.S. and Europe. Open banking is becoming more common among consumers and fintech and being able to take advantage of this future growth will greatly benefit Mastercard’s revenue.

Comparison To Visa

Mastercard is currently a duopoly with Visa in the payment processing space. The company has continued to gain market share on Visa and has started to transition to future growth prospects. These two conclusions may set Visa behind Mastercard in future years.

Global Card Market Share


Looking at Visa’s market share growth, they have been relatively the same for the past 10 years. However, Mastercard has doubled its market share, slowly catching up to Visa. Mastercard’s growth has been in emerging markets and growing countries, leading to future long-term benefits rather than Visa’s stronger position in well-developed countries. As the cash trend continues to diminish, Mastercard will be better positioned to benefit from more exposure in countries with more cash.

Mastercard & Visa's services as a percentage of revenue

Mastercard & Visa 10k

Mastercard’s main growth opportunities will outpace Visa’s over the long term. As I stated earlier, Mastercard will be emphasizing its service growth. Visa has lagged in this service development, which currently only makes up nearly 7% of the company’s total revenue. Management for both companies believe their services will grow but services for Mastercard are projected to grow nearly 10% more annually than Visa. Mastercard also has a larger influence offering six different services compared to Visa’s four.

Growth in services will help Mastercard get the edge on Visa and allow for more incentive offerings. The higher margins that services offer give Mastercard the leeway to incentive customers more to their core business. This is apparent currently with margins of nearly 50% for both companies but Mastercard’s bottom line is losing one-third to incentives compared to one-fourth for Visa. With this continuing in the future, I can predict that Mastercard will continue to gain market share using incentives while retaining a near equal profit margin to Visa.

Profit Margin Comparison between Mastercard and Visa

Bloomberg, Q4 Earnings Call

Mastercard’s strong incentive program combined with its established services programs should make the company the future leader of the payment processing network. This long-term trend should generate an above-average return and outpace Visa. Based on this analysis, Mastercard should generate more future growth than Visa.

Potential Headwinds


Inflation has been steadily increasing over the past year to hit over 8% and benefits Mastercard more than hurts it. People pay more money per transaction because of inflation therefore when Mastercard takes a percentage of the total gross dollar amount there as prices rise their revenue rises. Mastercard will also increase profits because most of its costs are fixed, meaning they have minimal change.

Potential Economic Recession

Mastercard’s biggest risk moving forward is an economic recession. If a recession were to occur, payment volumes would decrease hindering the top line. However, Mastercard’s business is defensive and has recurring revenue. The bulk of payments include non-durable goods or goods that are necessary to survive creating recurring revenue. This means that even in an economic downturn, Mastercard makes consistent revenue.

Fed Increase in Rates

Consumption vs Federal Funds Rate

Consumption vs. Federal Funds Rate (CFRA, LATA, Bloomberg)

Some believe that an increase in the Federal Funds Rate will harm Mastercard’s revenue or net income. They believe that spending goes down as rates grow. However, there is no correlation between consumption and the Federal Funds Rate.


Mastercard’s historical financials are sound. Mastercard has increased both its revenue and net income every year for the past 10 years (not counting the COVID-19 year). Long-term debt has slowly increased with a large jump in 2019 due to acquisitions. Total liabilities have increased at a rate of $3 – $4 per year from 2015 (not including this year where it has decreased). Looking at leveraged free cash flow, it has increased every year except for 2019 and 2020 and took a significant jump in 2021. Mastercard’s dividend has increased consecutively over the past 11 years and will likely continue in the future.

Mastercard's Financials for Q1 2022

Mastercard’s Q1 Presentation

Mastercard recently had earnings on April 28, 2022. During this earnings report, Mastercard beat estimates on the top and bottom lines. Mastercard has had large increases in cross-border volumes, mainly from the amount of pent-up travel. This trend doesn’t seem to be stopping and will likely continue into the future.

At the Q1 earnings call, management stated that travel will still be a strong growth factor in the future. Management discussed that travel to their top 20 destinations was still 15% lower than 2019 levels, and with China still in lockdown, there is room to grow. Management also emphasized the growth of services and partnerships that will help increase their bottom line for the rest of this year.

MA Valuation

Mastercard’s share price has decreased significantly over the past few weeks and has been significantly discounted. Looking at the company’s long-term valuations, the DCF model produced a return to bear, base, and best cases. For the bear, base, and best cases, we assumed 12%, 14%, and 16% revenue growth rates. Growth rates are lower than what management predicts and are within the lines of average analyst predictions. We assumed a discount rate of 8.6% which derived its value from a long-term growth rate of 2.7% which is slightly below the 3% average for this industry. Also, with the current treasury yield today of 2.9%.

Looking at the outputs, the bear case produces a terminal value of $402,201 and a present value of $270,887. The equity value produced is $328,463 concluding with a share price of $335.12 returning 2.17%. The base case produces a terminal value of $443,201 and a present value of $298,501. The equity value produced is $360,752 concluding with a share price of $368.07 returning 12.22%. The best case produces a terminal value of $487,644 and a present value of $328,434. The equity value produced is $395,675 concluding with a share price of $403.67 returning 23.07%.

Based on analyst consensus, a price target is closer to the best case, but with uncertainty surrounding the economy, the base case will most likely play out in my view. Analysts are projecting a median of $440 a share but averages are closer to $410 a share. Going off of management’s growth predictions, the share prices will be closer to the median of $440 a share.

Relative valuation

Mastercard is currently trading below its P/E 3-year average of 42.4 and below its P/FCF 3-year average of 41.1. The company is trading slightly higher than Visa using these metrics, but Visa is currently above its 3-year average and the greater growth opportunities that Mastercard offers would be worth the slight premium.

Historical P/E for Mastercard & Visa


Now comparing some of these to other credit card competitors, Mastercard has the highest ROCE and return on assets. With some of these relative valuations in mind, we can assume that Mastercard is undervalued relative to its history and its competitors.

ROCE of Mastercard vs competitors



Mastercard has had strong outperformance in the past and will continue the trend in the future. As management continuously emphasizes the benefits of their service industry, Mastercard will increase margins and revenue. Mastercard’s core business will benefit from long-term cash trends and the impediment for Visa’s market share. Mastercard is currently undervalued compared to its history, competitors, and model. For these reasons, I believe Mastercard is an excellent long-term buy.