Risk/Reward Rating: Negative
Mastercard suffered an unusual year in 2020 as sales were hit hard by the COVID lockdowns. Meager revenue growth of 2% ex currency impacts returned in Q1 2021. Making matters worse, the forecast for Q2 2021 calls for revenue to be unchanged from that of Q2 2019 excluding the impact of acquisitions. This lack of organic growth is not what one would expect from a mega-cap company trading at an extreme valuation.
Valuation: 47x 2021 earnings estimates and 35x 2022 estimates. The company trades at an extraordinary 24x 2020 sales and 22x 2019 sales. While Mastercard has commanded a powerful market position historically, leading to a large valuation premium, this seems less likely going forward given the intense competition forming. The competition places the 2022 earnings estimates at risk. The company is spending a considerable amount of money on share buybacks to goose earnings per share in the near term.
It should be noted that revenue growth rates were decelerating rapidly in the years leading up to the 10% revenue decline in 2020 due to COVID. Revenue grew 13% in 2019 versus 20% in 2018, representing a 35% decline in the growth rate. With Q2 2021 organic revenue expected to be unchanged from that of Q2 2019, it is safe to say that Mastercard is looking like a mature company at this stage.
The competitive backdrop for the technology payment industry is one of the most fiercely intense in the world today. This is evidenced by the inroads made by large fintech firms such PayPal and Square not to mention other mega-cap tech firms like Alibaba and Apple. There are scores of smaller- and medium-sized firms that have entered the field in the last decade. Finally, given the extraordinary valuations placed on stocks in the space, VC firms are funding new competitors daily, including the tsunami of money flooding into the cryptocurrency space for payments.
All told, the evidence of a maturing company and the tsunami of competition points toward a challenging future for Mastercard. Given its historic duopoly position with Visa, the corporate culture will be tested globally. While the company is likely to do well enough and continue to partner with newcomers like Stripe, it is highly likely the stock will face a compression of the valuation multiple in the future, thus capping the upside potential and opening up downside possibilities.
Technical backdrop: Mastercard has lost upward momentum in recent years. This is evidenced in the 10-year monthly chart which shows an increasing frequency of large red ‘candles’ forming (negative months for the stock). Such negative months tend not to occur frequently in strong uptrends. These monthly reversals are supportive of the fundamental backdrop of maturation, extreme valuation, and intense competition.
Mastercard 10-year monthly chart
Technical resistance: $380 to $395 area.
Technical support: $340 area then the $280 zone.
Mastercard 1-year daily chart
Price as of report date 6-30-21: $366.83
Mastercard Investor Relations Website: Mastercard Investor Relations