My tip is Mastercard Inc (NYSE:MA). Why? While at home during the early days of the lockdown, I noticed the massive increase in the use of the internet, in particular, mine and my family’s consumer spending on it (my family’s cards are Mastercard). With little knowledge, I began researching this company and reviewed the news journals, websites and financial information online; I thought about the significant influences such as business model, credit card sector, payments landscape, trends in online consumers, and the impact of coronavirus.
Name: Christian Gamble
From: Tucson, Arizona
School: University of Arizona
Mastercard Inc: Buying A Brighter Future
Mastercard Inc is a card processing company that sits in the centre of card networks –comprised of the consumer, merchants, acquiring bank and issuing bank. Its role is to provide universally accepted payments and secure transactions. The beauty is - they do not issue cards nor extend credit but are critical to the payment system; without them it does not function! Taking a fee for transactions allows MasterCard to benefit significantly from continued structural world growth and as consumer spending becomes an ever-larger part of world GDP.
MasterCard vs Visa
While Visa is the slightly more dominant player, Mastercard Inc I think is well positioned to benefit from the continued evolution of the payments landscape; its core business model is centred on C2B payments which have significant room for growth supported by the sustainable trend of “cash to card”.
MasterCard’s focus on reducing friction within the payment value chain, benefits both the customers and them. Their success has seen significant growth in market share since the payment networks were established. While it seems litigation and regulation have presented some challenges recently, MasterCard have weathered this well.
Their only traditional competitor in this space is VISA. This dominant duopoly in this area of the market mean that MasterCard has an immense scale advantage which creates a huge moat for the competition – one of Warren Buffets favourite phrases when reviewing companies to invest in and one of Michael Porters five strategic forces.
The Cash Cow
Mastercard Inc uses their core payment networks as a “cash cow” to enhance their existing infrastructure, alongside building out the capabilities to move into new payment systems that significantly expands their potential marketplace – building a system which will allow making payments anytime, anyplace, anywhere.
MasterCard are strategic thinkers; the new technology that my generation use could be considered a threat (Apple Pay, PayPal, Facebook) but MasterCard has been active in securing the C2B (consumer to business) market, neutralising the threat from the FAANGs and “FinTechs” through clever partnerships and are now attacking these digital players aggressively as they look to expand into new market segments (rather than just geographies) to capture new payment flows. China UnionPay (China’s national scheme; government backed monopoly) and RuPay (India’s equivalent) could be
disrupters but this will only lead to MasterCard having a slightly smaller share of a much larger pie!
New verticals (B2B, B2C, P2P, and G2C) represent a marketplace five times larger than the existing C2B market; MasterCard have invested heavily to expand their capabilities in recent years and now have the technology to move into these new markets.
I expect the revenue growth of Mastercard Inc to accelerate significantly:
- 500 million unbanked individuals getting access to MasterCard;
- Educational online money programs reaching over 100 million people;
- Cash transactions over 12 a month on average can be replaced entirely by tap to pay (e.g. Major transit systems like NY)– with current growth of over 20% per annum;
- New verticals listed above represent $185 trillion market versus current C2B marketplace of $30 trillion;
Impact Of COVID-19 On It's Share Price
The impact of COVID-19 on the global economy and investor sentiment has resulted in a significant drawdown in the share price ($38%) – due to impact on retail, international travel and discretionary spending amongst others. This share price presents a fantastic opportunity as the economy will return, and the shift from handling cash to online will provide a favourable tailwind.
Why not VISA? Mastercard Inc has embraced artificial intelligence and new technologies, and its increasing market share from 8% to 14% over the last ten years are promising. Its price dipped to $211 and currently trades at $230. While its Price to Earnings ratio is high (above 30), the stock has huge potential to exceed its high ($344) and over the next few years trade significantly higher. In this uncertain world, the dislocation between my fair value and MasterCard’s current price, the limited downside with investing in this company combined with this opportunity (risk versus reward) is the reason I chose MasterCard. While I don’t own MasterCard shares as yet, I am now about to follow my conviction.