Talking Stocks: MasterCard Inc.
Is This Company Worth Investing In?
Whether it’s swiping your card over a Starbucks machine or purchasing your next set of outfits on ASOS, there’s a high probability that you’ve been using our latest Stock Pick of the Week.
From pioneering the digital payments industry to quadrupling their market capitalization in the last 5 years, MasterCard Inc. has been growing at obscenely attractive levels. Whilst there are plenty of companies following the same, or even higher growth levels, very few are backed by strong fundamentals: and MasterCard is certainly one of these minorities.
Consider TDP’s argument for why this stock should be on your radar in the quarters to come below:
1. Growing Market
There are several key markets that have seen growth over the last several years – healthcare, electric cars, currency alternatives and more – but the most steadily growing among these is the e-commerce market. This is because low-cost e-commerce expenditure occurs in almost every household – wealthy or middle class, millennial or generation Z – almost everyone naturally has the incentive to gratify themselves with a purchase or two.
Since 2014, the level of “gratification” that individuals seek has clearly been growing, with total spending on e-commerce reaching over $3.5 trillion in 2019, as shown below:
Figure 1: Worldwide Growth in Sales of E-commerce
Source: (Statista, 2020)
While we’ve already seen staggering improvement, analysts forecast even further growth to a level almost double our current spending: $6.5 trillion by 2023. With much greater demand for e-commerce coming our way, this means that the demand for payment services is likely to increase as well: i.e. e-commerce and payment processors are complementary products.
As online retailers experience more consumption, they generally aim to improve the payment experience for the consumer, through different payment options, offers, and reward schemes: all of which is done by partnering with several types of payment processors.
However, since MasterCard has strong relationships with online retailers and the fact that they have a vast array of resources, this means that they are essentially the one-stop-shop to provide good offers and flexible payment systems for all e-commerce sellers. Hence, providing these services to the growing industry of e-commerce and being the go-to option for retailers is supremely why MasterCard holds a strong chance of augmenting well over the next several quarters: both in terms of stock price and profitability.
Key Point: The economy is forecasted to be relatively volatile in the coming quarters, with the Coronavirus potential pandemic as well as the presidential elections in November. This means that MasterCard stock may experience some turbulence, which is why investors need to be appropriately prepared before putting their money to work.
Given the vigorously competitive nature of the payment industry and the fact that most of the big players have homogenous products, getting ahead tends to occur from acquisitions and assuming greater market share. In this space, MasterCard has certainly “upped their game” as opposed to the other payment providers:
a) In March 2019, MasterCard acquired Ethoca: a tech company that enables more advanced detection of fraudulent activity for merchants and issuers. This purchase is in correlation with the movement towards greater security of personal data and cybersecurity as a whole. The fact that MasterCard has acquired fraud detection software without starting their own branch means that they can profit from the data security market without going through the effort and bureaucracy of doing it on their own.
b) Additionally, MasterCard acquired Vyze: a financing company that provides flexible “pay now” or “pay later” options for consumers once they have decided on a purchase. This taps into the “convenience” that consumers are increasingly moving towards, and this is why MasterCard’s decision in this space could prove rewarding.
c) MasterCard has also partnered with R3: a blockchain technology firm that aims to revolutionize cross-border payments and financial infrastructure as a whole. This partnership comes in correlation with the rise of blockchain and once again depicts how MasterCard leverage these technology trends to create products that can add value to consumers and businesses: both of which are routes to improve their revenues in the future.
While most of the big players in the payments industry participate in acquisitions and technological advancements, the rate at which MasterCard is progressing with these markets is what puts this company ahead of its key competitors.
3. Rate of Growth Versus Competitors
Figure 2: MasterCard Stock Price Growth vs Visa
Source: (The Motley Fool, 2019)
As depicted above, we can see that MasterCard’s stock price rose by 58% in the given period, whilst Visa’s augmented by only 40%. Although both statistics are impressive, the fact that MasterCard leads by over 18% reflects their vigorous growth levels and ability to leverage gaps in the market better than other firms. The fact that this disparity in growth between the two companies has continued through 2019 shows that the market also is taking confidence with MasterCard’s path towards leading the payments industry.
What are some limitations to MasterCard's Growth?
Aside from the aforementioned key points about the economy as a whole, the financial services industry tends to be heavily regulated. This could potentially worsen as Senator Elizabeth Warren is a frontrunner in the Presidential Election: i.e. MasterCard's stock could be slightly vulnerable if she is elected, given her history of harshness against Wall Street.
Additionally, increasing competition and cheaper alternatives from China may reverse the demand for MasterCard services, as companies will be seeking the most cost-effective payment partners. While this would usually be threatening, the variety of acquisitions that MasterCard has made will allow them to provide services of different price ranges: catering to consumers of all income classes.
Hence, this competitive advantage - along with the growing market and their current momentum - puts MasterCard in the front seat in terms of future sentiment. Their merits clearly outweigh their short-term constraints, which is why it will be an interesting journey to see where this stock ends up in 2020-2021.