$MasterCard(MA)$ $NASDAQ(.IXIC)$
Mastercard (MA) is a global payments company that connects consumers, merchants, financial institutions, governments, and other organizations on a multi-rail payments network. Mastercard provides financial transaction processing services in more than 150 currencies and across more than 210 countries and territories. Mastercard’s revenues are derived from transaction processing, domestic assessments (referring to fees on the dollar volume activity of transactions), cross border volume fees and value-added offerings.
Investment Overview
14% penetration rate in target addressable market of $115t. Mastercard sees a target addressable market of $115t, of which 51% is expected to be card based and the remaining 49% will be non-card based. Currently c.95% of Mastercard’s revenue is card-based and c.5% is non-card based. This implies that there is larger room for growth in non-card based payments that involve account-to-account transactions such as peer-to-peer payments, direct payments from business-to-consumer /government-to-consumer, and disbursements and remittances. According to Bloomberg Intelligence estimates, Services can also provide an additional avenue of growth with the potential to expand 25%. With a strong core in carded products alongside growth in non-card flows, new card use cases, services, and new networks, Mastercard should be well poised to deliver consensus expectations of 17.2% CAGR of EPS between FY23-FY26F.
Global shift from cash to digital payments a key long-term driver, boosted by growth of cross border payments. Growth drivers of Mastercard include the (i) global migration from cash to electronic payments that is boosted by increasing e-commerce penetration, (ii) rising consumer spending, and (iii) growth of cross border payments on the back of travel and e-commerce. Consensus estimates point to a 25% and 15% increase in cross border volume fees in FY23/FY24F, which will likely drive growth as global travel demand continues to show sustained recovery. Notably, Mastercard has higher exposure to International revenues contributing c.65% of its FY22 net revenue compared to Visa’s 56%. We are of the view that the growth opportunity for Mastercard is larger given the higher cash and check penetration rates in regions outside of North America ranging from 28% in Europe, 19% in APAC, 41% in CEMEA, and 38% in Latin America compared to 11% in North America.
High net margins above 45% owning to strong competitive moat. Mastercard operates in a lucrative oligopoly, and it reaps powerful network effects owning to the vast number of merchants and cardholders that it serves. Mastercard now serves more than 90 million merchants which grew at a CAGR of 18% across the last 3 years. In its two-sided platform business model, every cardholder or merchant that comes onboard with Mastercard creates incremental value for the other party, which in turn deters incumbents by creating high barriers to entry. Consequently, Mastercard enjoys high net margins in excess of 50% which are significantly higher than the vast majority of businesses.
Regulatory risks. Operating in an oligopoly, Mastercard’s dominance and its network fees have been under regulatory scrutiny. Changes in laws that affect payment networks such as Mastercard could potentially lead to significant losses in earnings.
Severe and prolonged recession. If consumer spending habits are significantly altered due to a downturn or market expectations of a downturn, the core business may be hampered by lower volume fees.
Buy Now Pay Later (BNPL) displacing credit. The growth in BNPL penetration rates could pose a risk to credit as consumers substitute credit card transactions with BNPL. A McKinsey consumer study shows that 39% of survey participants would have used a credit card for their purchases if BNPL did not exist. Nonetheless, Mastercard has developed its own BNPL product as a hedge.
According to consensus estimates, Mastercard has the highest EPS CAGR of 17% between FY23-FY26F compared to Visa’s 14%. Long term secular trends such as the shift from cash to electronic payments will be a key driver for Mastercard.
DYODD @MillionaireTiger @TigerStars @Daily_Discussion @TigerEvents
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
