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Mastercard, Inc. (MA)

September 06, 2024

Compared to: American Express Co. (AXP) | Visa, Inc. (V) | Consumer Discretionary Select Sector SPDR Fund (XLY)

Our reasoning

Mastercard's current valuation appears slightly overvalued based on its above-average P/E and EV/EBITDA multiples compared to industry standards. However, this premium is partially justified by the company's superior profitability metrics, strong market position, and robust growth prospects in digital payments and value-added services. The small overvaluation reflects a balance between these positive factors and potential risks from regulatory pressures and intense competition.

Key takeaways
  • Mastercard is a leading global payments technology company with a strong financial position and a positive future outlook.
  • The company's revenue growth is strong and appears sustainable, driven by the secular shift to digital payments and its strategic initiatives.
  • Mastercard's profitability is very strong and consistent, reflecting its dominant market position and efficient operations.
  • The company's cash flow generation capacity is robust, allowing it to fund its investments and shareholder returns effectively.
  • However, the company's high level of financial leverage could pose a risk in the event of an economic downturn.
  • The company faces significant legal and regulatory risks, including ongoing litigation and investigations related to its interchange fees and other practices.
  • Despite these risks, Mastercard's strong financial performance, diversified business model, and commitment to innovation position it well for continued success in the long term.
Overvalued
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Evaluation summary

  1. Company Overview:

    • Mastercard is a global technology company that operates a payments network, connecting consumers, financial institutions, merchants, and governments worldwide. The company's core business is providing payment processing services, including authorization, clearing, and settlement of transactions. Mastercard does not issue cards, extend credit, or set merchant discount rates.
    • Mastercard's key products and services include its core global payments network, value-added services like data analytics, fraud/security, and identity/authentication solutions, and new network capabilities like open banking and digital identity solutions.
    • Mastercard's target market is broad, encompassing consumers, businesses, and governments across various industries and geographies. The company's focus is on expanding its reach into new markets, including emerging economies and B2B verticals.
    • We are using the Consumer Discretionary Select Sector SPDR Fund (XLY) as a benchmark for comparing Mastercard's price performance and risk-adjusted returns. We are also comparing Mastercard to its industry peers, American Express Co. (AXP) and Visa, Inc. (V), to assess its relative financial performance, growth prospects, and risk profile.

  2. Financial Performance:

    • Mastercard has consistently demonstrated strong financial performance, with steady growth in revenue, profitability, and cash flow generation.
    • Revenue growth has been driven by increasing transaction volume, expansion into new markets, and the adoption of value-added services.
    • Profitability has been supported by efficient cost management, positive operating leverage, and a diversified business model.
    • Mastercard's return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) have consistently outperformed the industry average, highlighting its efficient operations and strong market position.
    • Compared to its peers, Mastercard has generally outperformed Visa in terms of financial performance but has underperformed American Express, particularly in the longer timeframes.

  3. Operational Efficiency:

    • Mastercard maintains a healthy short-term liquidity position, as evidenced by its current ratio being slightly above 1.
    • The company's strong operating cash flow trends indicate a strong ability to meet short-term obligations.
    • Mastercard's solvency ratios indicate a high level of financial leverage, which could pose a risk in the event of an economic downturn.
    • The company's strong cash flow generation capacity provides a buffer against potential solvency concerns.
    • Mastercard's free cash flow margin is high, indicating a strong ability to generate cash from its operations.
    • The company's increasing capital expenditures suggest a focus on organic growth and expansion.
    • Mastercard's capital allocation strategy appears to be balanced, with a focus on both organic growth and shareholder returns.
    • Compared to its peers, Mastercard's operational efficiency is generally strong, with higher ROA, ROE, and ROIC than Visa. However, American Express has consistently demonstrated higher operational efficiency than Mastercard.

  4. Growth Opportunities:

    • Mastercard is focused on expanding its reach into new markets, including emerging economies and B2B verticals.
    • The company is also investing in new technologies, such as real-time payments and digital currencies, to capitalize on the evolving payments landscape.
    • Mastercard's strategic focus areas include expanding in new geographies, further digitizing the payments ecosystem, enhancing value-added services, and penetrating new B2B verticals.
    • The company has a history of successful acquisitions, which have helped it to expand its product offerings and market reach.
    • Mastercard's capital allocation strategy is aligned with its growth objectives, with a focus on investing in organic growth opportunities and shareholder returns.

  5. Risks and Threats:

    • Mastercard faces significant legal and regulatory risks, including ongoing litigation and investigations related to its interchange fees and other practices.
    • The company's business model is subject to significant competition from a wide range of payments providers, including potential disintermediation by customers or new entrants.
    • The company's high level of financial leverage could pose a risk in the event of an economic downturn.
    • Mastercard is also exposed to risks related to information security incidents, data breaches, and service disruptions.

  6. Valuation Analysis:

    • Mastercard's valuation metrics, such as its price-to-earnings (P/E) ratio and enterprise value-to-EBITDA (EV/EBITDA) ratio, are generally in line with its peers.
    • The company's valuation is supported by its strong financial performance, growth prospects, and market position.
    • Potential catalysts for Mastercard's valuation include continued growth in transaction volume, expansion into new markets, and the adoption of new technologies.

  7. Price Performance:

    • Mastercard's stock price has consistently outperformed the Consumer Discretionary Select Sector SPDR Fund (XLY) over various time periods.
    • The company's stock price has also generally outperformed Visa, Inc. (V), but has underperformed American Express Co. (AXP).
    • Mastercard's stock price has been more volatile than its peers, as indicated by its higher beta.

  8. Future Outlook:

    • Mastercard's management is optimistic about the company's future prospects, citing the continued secular shift to digital payments and the company's strategic initiatives.
    • The company expects continued revenue growth in the high single-digit to low double-digit range, driven by its expansion into new geographies and B2B verticals, as well as strong demand for its value-added services.
    • Analyst estimates for Mastercard's future performance are generally positive, with expectations for continued revenue growth and profitability.

  9. Summary:

    • Mastercard is a leading global payments technology company with a strong financial position and a positive future outlook.
    • The company's revenue growth is strong and appears sustainable, driven by the secular shift to digital payments and its strategic initiatives.
    • Mastercard's profitability is very strong and consistent, reflecting its dominant market position and efficient operations.
    • The company's cash flow generation capacity is robust, allowing it to fund its investments and shareholder returns effectively.
    • However, the company's high level of financial leverage could pose a risk in the event of an economic downturn.
    • The company faces significant legal and regulatory risks, including ongoing litigation and investigations related to its interchange fees and other practices.
    • Despite these risks, Mastercard's strong financial performance, diversified business model, and commitment to innovation position it well for continued success in the long term.
Peer fundamentals 
Fundamentals
Insights
  • Mastercard is a leading global payments technology company with a strong financial position and a positive future outlook.
  • The company's revenue growth is strong and appears sustainable, driven by the secular shift to digital payments and its strategic initiatives.
  • Mastercard's profitability is very strong and consistent, reflecting its dominant market position and efficient operations.
  • The company's cash flow generation capacity is robust, allowing it to fund its investments and shareholder returns effectively.
  • However, the company's high level of financial leverage could pose a risk in the event of an economic downturn.
  • The company faces significant legal and regulatory risks, including ongoing litigation and investigations related to its interchange fees and other practices.
  • Despite these risks, Mastercard's strong financial performance, diversified business model, and commitment to innovation position it well for continued success in the long term.
Analysis
  • Revenue - Mastercard's revenue growth is strong and appears sustainable, driven by the secular shift to digital payments and the company's strategic initiatives. - The company is expanding in new geographies and penetrating new B2B verticals, which is driving revenue growth. - The company's revenue growth is also being driven by strong demand for its value-added services, such as data analytics, fraud/security, and identity/authentication solutions.
    • Profitability
      • Mastercard's profitability is very strong and consistent, reflecting the company's dominant market position and efficient operations.
      • The company's high profit margins are a result of its effective cost management and its ability to deliver positive operating leverage.
      • The company's diversified business model, with robust performance across both the payments network and value-added services, is a key driver of its profitability.
    • Liquidity
      • Mastercard maintains a healthy short-term liquidity position, as evidenced by the current ratio being slightly above 1.
      • The company's strong operating cash flow trends indicate a strong ability to meet short-term obligations.
      • However, the current ratio is below the industry average, suggesting a lower level of liquidity compared to peers.
    • Solvency
      • Mastercard's solvency ratios indicate a high level of financial leverage, which could pose a risk in the event of an economic downturn.
      • However, the company's strong cash flow generation capacity provides a buffer against potential solvency concerns.
      • The company's debt to EBITDA ratio is also relatively high, indicating a significant level of debt relative to earnings.
    • Operational Efficiency
      • Mastercard's efficiency ratios indicate a high level of asset utilization efficiency.
      • The company's return on assets, return on equity, return on total capital, and return on invested capital are all significantly higher than the industry average, highlighting the company's efficient operations and strong market position.
    • Cash Flow Analysis
      • Mastercard's cash flow generation capacity is strong, driven by its robust revenue growth and efficient operations.
      • The company's free cash flow margin is high, indicating a strong ability to generate cash from its operations.
      • The company's increasing capital expenditures suggest a focus on organic growth and expansion.
      • The company's capital allocation strategy appears to be balanced, with a focus on both organic growth and shareholder returns.
    • Risk Factors
      • The company's high level of financial leverage could pose a risk in the event of an economic downturn.
      • The company faces significant legal and regulatory risks, including ongoing litigation and investigations related to its interchange fees and other practices.
      • The company's business model is subject to significant competition from a wide range of payments providers, including potential disintermediation by customers or new entrants.
    • Future Outlook
      • Mastercard's future outlook is positive, driven by the secular shift to digital payments and the company's strategic initiatives.
      • The company expects continued revenue growth in the high single-digit to low double-digit range, driven by its expansion into new geographies and B2B verticals, as well as strong demand for its value-added services.
      • The company expects to maintain its high profit margins, reflecting its focus on disciplined cost management and delivering positive operating leverage.
      • The company's strong cash flow generation capacity is expected to continue to support its debt repayment capacity, dividend growth potential, and investments in organic growth opportunities.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-08-29)
Consumer Discretionary Select Sector SPDR Fund (XLY)
  • Performance Comparison: Mastercard, Inc. (MA) has consistently outperformed Consumer Discretionary Select Sector SPDR Fund (XLY) over various time periods, including year-to-date, one-week, one-month, three-month, six-month, one-year, two-year, and three-year periods. This suggests that MA has been a stronger performer than the broader consumer discretionary sector.
  • Risk and Return Analysis: MA has generated higher annualized returns than XLY over the past three years. However, MA has also exhibited higher annualized volatility than XLY, indicating that it carries a higher risk profile. MA's maximum drawdown of 28.25% is slightly lower than XLY's maximum drawdown of 39.67%, suggesting that MA has been more resilient to market downturns.
  • Risk-Adjusted Performance: MA's Sharpe Ratio has generally been higher than XLY's, indicating that MA has offered better risk-adjusted returns over the past three years. MA's higher beta suggests that it is more sensitive to market movements than XLY, which is consistent with its higher volatility.
  • Overall Assessment: Mastercard, Inc. (MA) has demonstrated strong performance relative to the Consumer Discretionary Select Sector SPDR Fund (XLY) over the past three years. While MA carries a higher risk profile, as evidenced by its higher volatility and beta, it has also generated higher returns and offered better risk-adjusted performance. MA's consistent outperformance and resilience to market downturns suggest that it may be a valuable addition to a diversified investment portfolio. However, investors should carefully consider their risk tolerance and investment objectives before making any investment decisions.
Peers Price History(as of 2024-08-29)
American Express Co. (AXP)Visa, Inc. (V)
  • Performance Comparison:
    • Mastercard, Inc. (MA) has generally underperformed American Express Co. (AXP) over the past three years, particularly in the longer timeframes. However, MA has consistently outperformed Visa, Inc. (V) in most periods.
    • MA's performance has been more volatile than AXP and V, with periods of both outperformance and underperformance.
  • Risk and Return Analysis:
    • MA has provided lower annualized returns than AXP in all three timeframes. However, MA has provided higher annualized returns than V.
    • MA has been more volatile than AXP and V, as indicated by its higher annualized volatility.
    • MA's maximum drawdown was slightly lower than AXP and V, suggesting that MA may be slightly less risky. However, it's important to note that all three companies experienced significant drawdowns in Q3 2022 and Q4 2022.
  • Risk-Adjusted Performance:
    • The Sharpe Ratio for AXP has consistently been higher than MA and V, indicating that AXP has been offering better risk-adjusted returns.
    • MA's beta value has generally been above 1, suggesting that it is more sensitive to market movements than AXP and V.
  • Overall Assessment:
    • MA has consistently outperformed V in terms of performance and risk-adjusted returns. However, MA has underperformed AXP in most periods.
    • MA's higher volatility and sensitivity to market movements (as indicated by its beta) suggest that it may be a riskier investment than AXP.
    • The recent trends suggest that MA's volatility and beta have been decreasing, which could make it a more attractive investment in the future. However, it's important to consider the overall market conditions and the specific investment objectives before making any investment decisions.
Peers Fundamentals(as of 2024-06-30)
American Express Co. (AXP)Visa, Inc. (V)

  1. Market Position and Size:

    • Mastercard, Inc. (MA) is a large player in the "Miscellaneous Commercial Services" industry, with a market capitalization of 444,180 million, significantly larger than American Express Co. (AXP) at 184,723 million. However, MA's market cap is smaller than Visa, Inc. (V) at 542,032 million.
    • MA's market cap is significantly larger than AXP, indicating a larger scale of operations and potentially greater market influence. However, MA's market cap is smaller than V, suggesting that V may have a stronger market position and potentially higher growth potential.
    • Examining the relationship between market cap and key financial metrics, MA's revenue, EBITDA, and net income are significantly lower than V, despite having a larger market cap than AXP. This suggests that MA may be valued at a premium compared to AXP, potentially due to its higher growth potential or stronger brand recognition.
    • Overall, MA occupies a middle ground in terms of size within its peer group, being larger than AXP but smaller than V. Its valuation relative to its peers suggests that the market may perceive MA as having a stronger growth potential or a more robust business model than AXP, but potentially lower growth potential than V.

  2. Profitability and Efficiency:

    • MA exhibits significantly higher profitability compared to both its peers and the industry average. Its Gross Profit Margin of 96.77% is significantly higher than AXP's 60.72% and V's 77.11%, and far surpasses the industry average of 14.53%. Similarly, MA's EBITDA Margin of 61.67% is significantly higher than AXP's 30.36% and V's 70.15%, and well above the industry average of -178.87%. MA's Net Profit Margin of 46.82% also outperforms AXP's 16.26% and V's 53.93%, and is significantly higher than the industry average of -304.49%.
    • Considering MA's size and revenue, its profitability metrics are impressive. Despite having lower revenue than both AXP and V, MA consistently generates higher margins, indicating a more efficient and potentially more profitable business model.
    • Overall, MA significantly outperforms both its peers and industry standards in profitability metrics. This suggests that MA has a strong competitive advantage in terms of cost control and revenue generation, allowing it to generate substantial profits even with a relatively smaller revenue base.
    • MA demonstrates exceptional efficiency in generating returns compared to its peers and industry averages. Its Return on Average Assets (ROA) of 30.14% is significantly higher than AXP's 3.78% and V's 20.88%, and far surpasses the industry average of -7.41%. Similarly, MA's Return on Average Total Equity (ROTE) of 189.68% is significantly higher than AXP's 34.71% and V's 47.82%, and well above the industry average of -21.18%. MA's Return on Average Total Capital (ROTC) of 68.87% also outperforms AXP's 18.14% and V's 39.16%, and is significantly higher than the industry average of -0.25%. MA's Return On Average Invested Capital (ROIC) of 58.75% is also significantly higher than AXP's 12.64% and V's 31.4%, and well above the industry average of -14.02%.
    • MA's high returns on assets, equity, capital, and invested capital demonstrate its ability to generate significant profits from its assets and investments. This suggests that MA has a highly efficient business model and a strong competitive advantage in terms of resource utilization and profitability.
    • Overall, MA's efficiency in generating returns is exceptional compared to its peers and industry averages. This suggests that MA is a highly profitable and efficient company, capable of generating substantial returns for its shareholders.

  3. Financial Health and Stability:

    • MA's liquidity and solvency metrics are generally strong, although some aspects require further examination. Its Current Ratio of 1.14 is slightly lower than V's 1.37 but significantly lower than the industry average of 2.33. Similarly, MA's Quick Ratio of 1.14 is lower than V's 1.37 and the industry average of 2.23. These ratios suggest that MA may have a slightly lower level of short-term liquidity compared to its peers and the industry.
    • MA's Total Debt to Total Equity Ratio of 210.28 is significantly higher than AXP's 179.96 and V's 51.86, and also higher than the industry average of 172.58. This indicates that MA has a higher level of debt compared to its equity, which could potentially increase its financial risk. However, MA's Debt / EBITDA ratio of 0.97 is lower than AXP's 2.51 and V's 0.84, and also lower than the industry average of 3.72. This suggests that MA's debt burden is manageable relative to its earnings.
    • Overall, MA's liquidity position is slightly weaker than its peers and the industry average, while its debt position is higher than its peers and the industry average. However, MA's debt burden appears manageable relative to its earnings.

  4. Valuation and Market Perception:

    • MA's valuation metrics are generally higher than its peers and the industry average, suggesting a premium valuation. Its Enterprise Value To Sales (EV/Sales) ratio of 15.85 is significantly higher than AXP's 2.34 and V's 15.32, and well above the industry average of 135.01. Similarly, MA's Enterprise Value To EBITDA (EV/EBITDA) ratio of 25.99 is significantly higher than AXP's 7.85 and V's 21.86, and also higher than the industry average of 17.61.
    • MA's Price To Earnings (P/E) ratio of 36.74 is significantly higher than AXP's 19.38 and V's 29.8, and also higher than the industry average of 53.63. MA's Price to Book Ratio of 59.99 is significantly higher than AXP's 6.26 and V's 14.21, and well above the industry average of 6.55. MA's Price To Sales Ratio of 16.93 is significantly higher than AXP's 2.62 and V's 15.94, and well above the industry average of 146.73.
    • Overall, MA's valuation metrics are significantly higher than its peers and the industry average, suggesting that the market perceives MA as a high-growth and potentially more valuable company. This premium valuation may be attributed to MA's strong profitability, efficiency, and growth prospects.

  5. Cash Flow and Capital Management:

    • MA's cash flow generation is generally strong, although it is lower than its peers. Its Net Operating Cash Flow of 3,227 million is lower than AXP's 4,532 million and V's 5,134 million. However, MA's Total Capital Expenditure of 296 million is significantly lower than AXP's 566 million and V's 400 million. This results in a Free Cash Flow of 2,931 million, which is lower than AXP's 3,966 million and V's 4,734 million.
    • Considering MA's market cap, its cash flow generation is relatively lower than its peers. This suggests that MA may be less efficient in converting its earnings into cash flow compared to its peers.
    • Overall, MA's cash flow generation is strong, but it is lower than its peers, potentially due to its lower revenue base. However, MA's low capital expenditure suggests a focus on efficient capital allocation and potentially higher future growth potential.

  6. Growth and Future Prospects:

    • MA exhibits consistently higher growth rates compared to the peer group average in several key metrics. Its sales revenue, EBITDA, net income, and basic earnings per share have consistently grown at a faster pace than the peer group average over the past 5 years.
    • MA's growth rates have been relatively stable over the past 5 years, with minimal year-to-year fluctuations. This is evident in the low standard deviation of its year-over-year growth rates compared to the peer group average.
    • Comparing MA's 3-year and 5-year CAGR figures, it is evident that MA's growth has been more robust in the recent past. Its 3-year CAGRs for sales revenue, EBITDA, net income, and basic earnings per share are significantly higher than its 5-year CAGRs, indicating an acceleration in growth.
    • These growth trends suggest that MA has a strong competitive position and is likely to continue growing at a faster pace than its peers. Its superior growth in key metrics, coupled with its stable growth trajectory, indicates a sustainable and potentially more profitable future.
    • Key areas where MA shows superior growth compared to peers:
      • Sales/Revenue, in millions
      • EBITDA
      • Net Income
      • Basic Earnings per Share
    • Key areas where MA shows inferior growth compared to peers:
      • Free Cash Flow
      • Free Cash Flow Margin
      • Total Assets
      • Book Value Per Share
      • EBIT Margin
      • Return on Average Total Equity
    • Sustainability of MA's growth rates:
      • Sales/Revenue, in millions: Growth rates have been consistently increasing over the 5-year period.
      • EBITDA: Growth rates have been consistently increasing over the 5-year period.
      • Net Income: Growth rates have been consistently increasing over the 5-year period.
      • Basic Earnings per Share: Growth rates have been consistently increasing over the 5-year period.
      • Free Cash Flow: Growth rates have been fluctuating significantly over the 5-year period.
      • Free Cash Flow Margin: Growth rates have been fluctuating significantly over the 5-year period.
      • Total Assets: Growth rates have been consistently increasing over the 5-year period.
      • Book Value Per Share: Growth rates have been fluctuating significantly over the 5-year period.
      • EBIT Margin: Growth rates have been fluctuating significantly over the 5-year period.
      • Return on Average Total Equity: Growth rates have been fluctuating significantly over the 5-year period.
    • MA's most recent year-over-year growth rates are generally higher than its 5-year CAGRs, indicating an acceleration in growth for most metrics. However, free cash flow, free cash flow margin, book value per share, EBIT margin, and return on average total equity show deceleration trends.
    • MA's growth is balanced across different metrics, with strong growth in sales revenue, EBITDA, net income, and basic earnings per share. However, there are some potential red flags, such as the deceleration in free cash flow, free cash flow margin, book value per share, EBIT margin, and return on average total equity.
    • Overall, MA's growth profile is strong, with consistent growth in key metrics and an acceleration in recent years. However, the deceleration in some metrics, particularly free cash flow and profitability, requires further investigation.

  7. Potential for Investment:

    • Mastercard, Inc. (MA) presents an attractive investment opportunity, considering its strong financial performance, growth potential, and competitive position. Its exceptional profitability, efficiency, and consistent growth in key metrics suggest a sustainable and potentially more profitable future.
    • MA's high valuation metrics, particularly its EV/Sales, EV/EBITDA, P/E, and Price to Book ratios, reflect the market's perception of its strong growth potential and robust business model. However, its lower cash flow generation and high debt level compared to its peers are potential areas of concern.
    • Overall, MA's strong financial performance, growth potential, and competitive position make it an attractive investment opportunity. However, investors should carefully consider its lower cash flow generation and high debt level before making any investment decisions.

  8. Key Risks and Considerations:

    • MA's lower cash flow generation compared to its peers could potentially limit its future growth and ability to invest in new opportunities.
    • MA's high debt level could potentially increase its financial risk, making it more vulnerable to economic downturns or changes in interest rates.
    • The deceleration in some growth metrics, particularly free cash flow and profitability, requires further investigation to understand the underlying causes and potential implications.
    • The global payments industry is highly competitive, with numerous players vying for market share. MA's ability to maintain its competitive advantage and continue growing in this dynamic environment is a key consideration for investors.

  9. Overall Assessment:

    • Mastercard, Inc. (MA) is a financially healthy and well-positioned company with strong profitability, efficiency, and growth prospects. Its exceptional financial performance and competitive position make it a leading player in the global payments industry.
    • However, MA's lower cash flow generation, high debt level, and deceleration in some growth metrics are potential areas of concern for investors.
    • Overall, MA's strong financial performance, growth potential, and competitive position make it an attractive investment opportunity. However, investors should carefully consider its financial risks and potential challenges before making any investment decisions.