In a mere couple of months, the world has changed, but the reasons for owning Mastercard have not.
This article was originally written by Nicholas Rossolillo of The Motley Fool
Not even the best fintech stock in the decade after the Great Recession of 2008 to 2009 could hide from the coronavirus. Mastercard (NYSE:MA), the world’s second largest dedicated digital payments platform, has been hit hard by the contagion. At its lowest point last month, the stock was down over 40% from its all-time high, although as of this writing, it has recovered some of those losses.
Nevertheless, the coming economic downturn means less movement of money. For a toll-booth business like Mastercard that earns the bulk of its revenue by charging a small fee for processing transactions, that means leaner times lie immediately ahead.
Though the world has undeniably changed a great deal because of the COVID-19 pandemic, Mastercard is in good shape and should emerge stronger than ever. The short-term outlook isn’t great, and shares remain priced at a premium, but the long-term reasons for owning this war-on-cash leader are unchanged.
Tear up those 2020 forecasts
Even after toppling from its highs, Mastercard stock still trades at a premium price point: 36 times trailing 12-month free cash flow (what’s left after cash operating expenses and capital expenditures are paid out). It’s an especially high price considering the company added itself to the large and growing list of businesses downgrading expectations for the coming year. Management pulled its outlook for full-year 2020 revenue (previously pegged at a low-teens percentage increase) and downgraded its first-quarter 2020 revenue guidance to low single-digit percentage growth. Operating expenses should grow in the low- to mid-single-digit range, which includes the $250 million Mastercard pledged to support small businesses impacted by the coronavirus.
That could imply very little growth in earnings — or even a bottom-line contraction if operating expenses grow significantly faster than revenue. With the stock priced as if Mastercard will continue growing at a fast but steady clip for the foreseeable future, suffice it to say coronavirus and the disruption it has brought on the world is unwelcome news.
The war on cash was never going to be won in a year
Nevertheless, a bad quarter or even an entire year is not reason to part ways with a long-term winner like Mastercard. Ample profitability means the credit card and payments platform will be able to navigate the crisis without the need to take on new debt. This isn’t just a short-term trend either. As digital payments have grown as a percentage of the global transaction pie, profit margins have steadily gone up.
DATA BY YCHARTS.
Plus, digital payments are still a high-growth industry. Global revenue generated is expected to climb by high single-digit percentages for the next few years, according to McKinsey and Company. Most of the world still deals primarily in cash, so there’s plenty of room for companies like Mastercard to continue making the push toward a more digitally based system of money movement. The company’s immediate-term outlook, though lowered significantly, is testament to that. Many organizations are foreseeing a drop in sales, but Mastercard is still looking at year-over-year growth in the first quarter. Some of that pertains to the acquisitions made in recent years, and more takeovers could be in the making. The outlook could also change in subsequent quarters, but at this point in the crisis, it’s so far, so good.
And then, there’s the situation with China. Long walled off to foreign payment platforms, Mastercard got approval in early 2020 from the People’s Bank of China to begin setting up operations. Entering the massive country — home to the world’s largest base of digital consumers — will be an uphill battle against the virtual duopoly on the Chinese digital payments market between Alibaba and Tencent. But Mastercard is still generating plenty of growth from other emerging markets. China should thus be a notable addition that could help maintain growth for many more years.
A premium price for a best-in-class company
As a final consideration, Mastercard ended 2019 with $8.53 billion in debt, not a huge sum considering this payments giant generated $7.46 billion in free cash flow last year. Additionally, cash and short-term investments on the balance sheet totaled $7.68 billion. High profit margins, plenty of liquidity, and global secular trends favoring the industry it plays in add up to make Mastercard a best-in-class fintech stock.
The price tag on shares remains high and the immediate outlook uncertain as the world reels from the effects of the pandemic, but Mastercard is still a staple portfolio holding for the long term.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold no positions in companies mentioned above. Read our full disclosure policy here.
Nicholas Rossolillo owns shares of Alibaba Group Holding Ltd., Mastercard, and Tencent Holdings. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Mastercard, and Tencent Holdings. The Motley Fool has a disclosure policy.