Protection site

Mastercard stock: Inflation protection, growth and COVID rebound (NYSE: MA)

jbk_photography/iStock Editorial via Getty Images

Stock investors will be excused for taking a hit since the rocky start of 2021, especially in growth names. However, one stock that fits firmly into the “growth stocks” category has held up reasonably well so far, Mastercard (MA).

I expect that to continue and in this article I will explain why I believe the company is set up to outperform in the future.

Overview

Mastercard, throughout the COVID pandemic, has been a substantial underperformer compared to other large-cap growth names. This underperformance is largely due to the large share of revenues and profits from travel, especially international travel.

In the third quarter of 2021, the company only reached 97% of the cross-border transaction volume levels achieved in 2019, and considering the historical growth trajectory of this business, this still leaves the company well below of what it might have been if COVID had never happened. .

Cross-border takeover of Mastercard and growing market share

Mastercard presentation

This roadblock that the COVID pandemic placed directly in Mastercard’s path led to the title’s anemic performance, leaving the title almost exactly where it was at the start of the pandemic in February 2020.

Inventory Mastercard
Data by YCharts

The stagnation in equities from 2020 to present seems fully justified given the disruption of the cross-border revenue and profit machine that Mastercard has built, however, with the milder variant of Omicron and continued indications that the days of lockdown and travel restrictions may be coming to an end, consider that international travel simply has to return at some point.

Holiday travel 2021: Air traffic in the United States is approaching pre-Covid levels

TSA Air Traffic Report 2021

The number of domestic air travel in December 2021 was already a stone’s throw from pre-pandemic levels and while the arrival of Omicrons initially created a tightening of restriction in response, many governments around the world appear to view the Omicron variant as a sign that the disease will become endemic and people will have to live with the virus.

Travel bans to date have been terribly ineffective in preventing or slowing new variants according to the WHO and travel bans and restrictions have proven to be detrimental to low-income countries that depend on tourism revenue according to the agency.

International travel will eventually return, it just needs many tourism-dependent countries to survive fiscally. The question is when, not if, and Mastercard will powerfully benefit once cross-border volumes re-accelerate.

In addition to the eventual recovery of the high-yield travel segment, Mastercard is providing a natural and near-complete inflation hedge to its finances. It’s no secret that inflation has rocketed higher throughout the pandemic recovery for a myriad of reasons.

CPI December 2021: Inflation has risen by 7% over the past year, its highest level since 1982

CNBC

The latest figures for December 2021 show that inflation has not reached current levels since the 1980s. Whether it is a temporary peak in response to the COVID pandemic and a subsequent strong recovery or of the beginning of a new long-term trend is the subject of considerable debate, however, when it comes to Mastercard, inflation, especially when coupled with wage inflation, presents itself as a great tailwind for the company.

Mastercard’s revenue is almost entirely derived as a percentage of a transaction, so it doesn’t take a PhD to assume that a higher rate of inflation will directly benefit Mastercard’s bottom line as long as overall volume spending will not decrease.

An important factor in determining whether expenditures are likely to decline in response to price inflation is whether wages follow prices. Fortunately, for Mastercard and the American public, wage inflation so far seems to be tracking price inflation well.

The pandemic effect on measured wage growth

labor office

Theoretically, if purchase volume remained completely flat and Mastercard gained no new business or shares, the company should receive a “free” 7% increase in revenue from inflation alone. This fact makes the company particularly attractive given the fluid nature of the duration of the current inflation spike.

Valuation and future growth

None of the above reasons for future outperformance mean anything if the stocks are not reasonably valued. I believe that while they are not cheap, it can be argued that they are currently reasonable.

Mastercard PE ratio
Data by YCharts

Mastercard is currently trading at a still somewhat COVID-depressed PE ratio of 43.69, historically at the upper end of the recent range. However, the company is potentially looking at a very strong rollback in 2022, pushing the forward PE ratio to a historically constant level of 27.36.

Moreover, future growth rates certainly matter in assessing a fair price to pay for stocks. Fortunately, Mastercard is expected to grow by more than 20% over the next few years.

Mastercard 2022-2024 Performance Goals

Mastercard presentation

The company certainly seems well constituted to me. With the potential tailwind from the recent inflationary environment, the potential return of international and business travel, recent forays into the world of crypto, which in my view poses the only real major threat to the duopoly of Mastercard and Visa (V), and with expectations of a comprehensive buy-it-now, pay-later program launching in 2022, the company looks set to relaunch on all cylinders.

Mastercard building solutions to support the crypto-economy

Mastercard presentation

Mastercard payments

Mastercard presentation

Mastercard currently has a reasonable PEG ratio of 1.53 (43.69 PE ratio divided by 28.54% EPS growth) with a forward PEG ratio of 1.24 (33.8 forward PE ratio divided by 27, 15% EPS growth).

For a company that throughout its history has been considered chronically expensive, in today’s environment that certainly doesn’t seem to be in line with other mega-cap growth names.

BUSINESS CURRENT PEG FRONT PEG
Microsoft (MSFT) 1.99 1.96
Apple (AAPL) 6:39 p.m. 3.21
NVIDIA (NVDA) .73 2.28
Amazon (AMZN) NM 2.10
Mastercard (MA) 1.53 1.24

To be clear, I’m not saying Mastercard is cheap, however, I certainly don’t consider the stock to be too expensive given the expected growth over the next few years.

Risks

Recently, there has been a lot of talk about the potential for financial technology disruption affecting the operations of major card networks. Digital wallets such as Apple Pay, PayPal (PYPL), Block (SQ), etc. have grown in popularity in recent years and many investors are wondering if credit cards could replace checks.

As new technologies emerge every day, currently and contrary to many narratives, digital wallets seem to be a net benefit for a company such as Mastercard today. Digital wallets and the contactless payment market in which they are currently used are overwhelmingly tied to a credit or debit card, helping to accelerate cash disruption and provide more volume in payment networks. cards.

The vast majority of use cases currently bypassing credit cards with digital wallets seem to only further disrupt the cash market. For example, when you pay me $20 for gas or to pay for your share of the dinner tab, that’s not a transaction that Mastercard actually loses, because the final payment to a vendor is very likely to be made in one form or another. using a credit card network.

Furthermore, solutions capable of circumventing credit card networks, such as bank-to-bank direct transfers, are currently structured in such a way as to offer the end consumer no real tangible benefit compared to using a debit card, which is already charged to the consumer’s bank, in fact, given the fraud protection and potential rewards offered by most banks that issue them, end consumers don’t really want to switch and maybe they are worse off not using the card system.

In my opinion, the only real threats to card networks today seem to be cryptocurrency, and to a much lesser extent buy now pay later. Fortunately for investors, Mastercard has invested heavily in both of these areas. While this is a rapidly changing landscape and future threats can certainly emerge or intensify, current risks do not ring alarm bells for me.

Conclusion

Many other names in the growth space have benefited immensely from the COVID pandemic and are now starting to show weakness, conversely, Mastercard has basically come a long way in the past 2 years and is now looking to recover fully in stride with the benefit of historically high price and wage inflation, as well as the eventual resumption of cross-border volume activity providing a potential multi-year boost.

The stocks offer a reasonable current valuation and, adding the expected growth over the next few years, could be considered relatively cheap compared to their mega-cap counterparts.

In 2022, I’m interested in companies that have clear catalysts and Mastercard certainly qualifies given the setup presented. I expect Mastercard to outperform in the current environment and have recently strengthened my position and will continue to add to the weakness.

Thanks for reading and I look forward to your comments below, good luck everyone!