About Mastercard
I saw the red and orange Venn diagram-like bubbles all the time, but I never really knew exactly what Mastercard did, let alone how they make money.
They process payments and handle transactions; Mastercard is a middle man.
Ok, but how do they make money?
According to some sources, companies such as Mastercard and Visa make roughly 0.1% of each transaction passed through their card. While at first that sounds like a small cut, this tends to add up quickly given that Mastercard’s network can handle 5,000 transactions each second all around the planet.
Mastercard stands between you and your bank. You keep money in your bank account but all of the sudden, you feel the urge to go spend some money. You go to a few stores, buy a nice shirt, end up in your favorite shoe store, pick out the sickest sneaks, check your bank app to make sure you can cover them and hand your card sixteen-digit card to someone you’ve never met. After your long day of shopping, you go get some food at a local restaurant.
There’s a relatively high likelihood that in each purchase you made, Mastercard played a role in facilitating the transaction, and of course they made a fee on each of your transactions. In fact, Mastercard reportedly carried out over 25% of global credit card purchases around five years ago. We can only assume their share of the market has since grown.
If not Mastercard, it could’ve been formidable competitors such as Visa or Discover Card.
Nonetheless, this is the bulk of their business.
Additionally, it appears as though companies such as Mastercard also make money through assessment fees. Basically, these are fees charged to merchants (the stores and restaurants you visit) for using Mastercard’s (for the sake of the article) services.
However, while “assessment fees” is the commonly used phrase, Mastercard uses the term, “interchange fees.”
I already like how Mastercard makes their money, however let’s get a better picture of the company’s business, their current financial health and whether or not investing in the company’s stock is right for you!
Mastercard’s stock numbers
The company has a current market capitalization of just over $324 billion and a price-to-earnings ratio of 36.11.
While the market capitalization is merely used to display the enormity of the company, the P/E ratio is a little more important to prospective investors. Specifically, this metric indicates that Mastercard’s current share price of $333.41 is significantly overvalued.
This makes sense given that the company has quite an impressive run up in share price in the last five years. For instance, in April 2017 the stock was trading in the low $120 range and has since surged to the mid-to-upper $300 range.
Something else to note about the stock’s previous performance chart is the sharp drop in share price experienced during the onset of the COVID-19 pandemic.
Obviously, many large publicly traded corporations experienced major declines in share price and company value, however, payment processing companies such as Mastercard seem to be more sensitive to such economic shocks.
If any company’s success is tied to the general state of the global economy, it’s these types of companies. When people aren’t spending as much, Mastercard and Visa aren’t likely to collect as much in fees which can obviously devastate an integral part of their business model. However, at the end of the day people need to buy stuff when they go out and chances are high that Mastercard is somewhere involved in the transaction.
According to the company’s balance sheet, Mastercard maintains almost $38 billion in total assets and around $30.4 billion in total liabilities. These are tight, however we initially assume that the company isn’t going to have much of a problem paying down this debt. But, it would be foolish to simply assume this to be true, so let’s get a better idea of Mastercard’s financial situation.
Peering over their income statement, the company’s numbers don’t disappoint!
For example, their total revenue has been a general uptrend in the past five years, starting in 2017 at nearly $12.5 billion stretching upwards to nearly $19 billion in 2021. Thankfully, it can be noted that their total revenue didn’t drop substantially in 2019 or 2020. It did drop down to around $15.3 billion in 2020 but this was to be expected given the economic conditions at the time.
Over to the cash flow statement, the company’s net income has also generally risen in the last handful of years from almost $4 billion in 2017 to nearly $8.7 billion in 2021.
This is particularly fantastic news simply because the more net income Mastercard is able to generate, the more shareholder-centered activities they can engage in. Activities such as increasing their dividend, reinvesting in their current lines of business, paying down debt and buying out other companies are some of the perks of having a growing amount of net income.
Suffice it to say, the more cash that is flowing into the business, the better!
Let’s dive a little deeper into Mastercard’s financials, specifically as it relates to their profitability and other financials that might be of interest.
Mastercard’s stock financials
Mastercard does a fantastic job churning out a profit–so much so, their annual net profit margin is more than double than that of the industry average. This makes sense given that Mastercard (and Visa) have incredibly large competitive moats compared to their competitors.
The company also currently offers investors an annual dividend of $1.96 which is a nice added bonus to being a shareholder.
Additionally, Mastercard’s annual return(s) on equity, assets and investment are all strikingly higher than the industry average. For instance, the company’s annual return on equity stands around a whopping 142% to the industry’s 45.01%. Not only does the company appear to have a strong ability to produce a profit but they can also achieve returns on their invested capital.
Given all of this information, we’ve gathered a few key takeaways about this well-known payment processing giant.
Should you buy Mastercard stock?
The only objection we have to buying the stock is the current share price; many metrics point to the fact that shares of the company’s stock are currently overvalued (as of 5/9/2022). Other than simply waiting for the stock price to come down closer to fair value, this is a profit-achieving, ubiquitous behemoth of a company that is likely going to operate until the end of time.
Companies such as Mastercard and Visa maintain a considerable amount of market share of the payment space and it appears that they won’t relinquish it anytime soon.
However, as previously mentioned investors should be cautious of the fact that this company’s business is quite reliant on the general well being of the greater overall economy. When people aren’t spending as much or going out as much, companies such as Mastercard and its competitors stand to suffer.
Given the company’s strong financials yet high (overvalued) current stock price, we give the company a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.