Not even the best fintech stock in the decade following the Great Recession from 2008 to 2009 could hide from the coronavirus. MasterCard (NYSE: MA), the world’s second largest dedicated digital payment platform, has been hit hard by contagion. At its lowest point last month, the stock fell more than 40% from its all-time high, although at the time of this writing it has recovered some of these losses.
However, the next economic downturn means fewer money movements. For a toll company like Mastercard that earns most of its revenue by charging a small transaction processing fee, this means that the leaner times are immediately ahead.
Although the world has undeniably changed a lot due to the COVID-19 pandemic, Mastercard is in good shape and is expected to emerge stronger than ever. The short-term outlook is not exceptional and the shares remain listed at a premium, but the long-term reasons for owning this cash war leader are unchanged.
Rip those predictions of 2020
Even after collapsing from its highs, Mastercard shares are still traded at a premium price: 36 times transcending the 12-month free cash flow (what remains after the cash and capital expenditures were paid ). It is a particularly high price considering that the company has joined the large and growing list of companies that has downgraded expectations for the next year. Management developed its revenue forecast for the full year 2020 (previously tied to a low adolescence percentage increase) and downgraded its revenue guide for the first quarter of 2020 to a low single digit growth rate. Operating expenses are expected to grow in the range from one to a low to medium figure, which includes the $ 250 million Mastercard committed to supporting small businesses affected by the coronavirus.
This could result in very small earnings growth – or even a fall in profits if operating expenses grow significantly faster than revenues. With the listed stock as if Mastercard will continue to grow at a rapid but steady pace for the foreseeable future, suffice it to say coronavirus and the rupture it has brought to the world is unwelcome news.
The cash war would never have been won in a year
However, a bad quarter or even an entire year is no reason to part with a long-term winner like Mastercard. High profitability means that the credit card and the payment platform will be able to face the crisis without the need to take on new debts. This too is not just a short-term trend. As digital payments have grown as a percentage of the global transaction pie, profit margins have steadily increased.
In addition, digital payments are still a strong growth sector. According to McKinsey and Company, global revenue generated is expected to increase by high single-digit percentages for the coming years. Most of the world still mainly deals with liquidity, so there is room for companies like Mastercard to continue pushing towards a more digital-based monetary movement system. The short-term prospects of the company, although significantly reduced, are proof of this. Many organizations expect sales to drop, but Mastercard is still seeing year-on-year growth in the first quarter. Part of this relates to acquisitions made in recent years and further acquisitions may be underway. The outlook may change in the following quarters, but at this point in the crisis, it is so far, so good.
And then, there is the situation with China. Long postponed to foreign payment platforms, Mastercard obtained approval from the People’s Bank of China in early 2020 to begin installation operations. Entry into the vast country – home to the world’s largest digital consumer base – will be a tough battle against the virtual duopoly on the Chinese digital payments market between Alibaba is Tencent. But Mastercard is still generating a lot of growth from other emerging markets. China should therefore be a notable addition that could help maintain growth for many more years.
A premium price for a first-rate company
As a final consideration, Mastercard ended 2019 with $ 8.53 billion in debt, not a huge sum considering that this payment giant generated $ 7.46 billion in free cash flow last year. In addition, liquidity and short-term investments in the balance sheet amounted to $ 7.68 billion. High profit margins, a lot of liquidity and secular global trends that favor the sector in which it merges to make Mastercard a best-in-class fintech title.
The share price remains high and the immediate outlook is uncertain as the world rebels against the effects of the pandemic, but Mastercard is still a long-term base portfolio.