Should You Buy This Blue-chip Fintech Stock?
The foundation of successful long-term investing is owning the highest quality businesses in industries that will grow in importance over time.
Since the global economy depends on the timely and orderly execution of financial transactions between two or more parties, the payments industry is a safe bet for the long term. As the second largest payment processing company in the world behind Visa (V -0.23% )it is hard to imagine a future in which MasterCard ( MY -0.11% ) don’t continue to do well.
But is the fintech stock a buy? Let’s dive into its fundamentals and the valuation of this fintech to answer this question.
Business is booming for Mastercard
On January 27, Mastercard announced impressive fourth quarter results.
Mastercard reported net revenue of $5.22 billion in the fourth quarter, representing growth of 26.6% over the same period a year earlier. That was slightly higher than the $5.17 billion in net revenue that analysts had predicted for the quarter. But how did Mastercard beat the analyst consensus for the ninth quarter of the last 10?
Mastercard’s strong net revenue growth is the result of consumers, businesses and governments around the world adapting to the ongoing COVID-19 pandemic, according to CEO Michael Miebach’s opening remarks during his recent call for results.
This helps explain why Mastercard’s gross dollar volume grew 23% year-over-year in local currency to $2.1 trillion in the fourth quarter.
And thanks to the reopening of several borders in the fourth quarter, Mastercard’s cross-border volumes soared 53% compared to last year. What’s really encouraging is that this is equivalent to 109% of 2019 pre-pandemic levels according to CFO Sachin Mehra’s opening remarks on the earnings call.
Even though the omicron variant has a moderate effect on cross-border travel at the end of the quarter, Mastercard expects cross-border travel to return to pre-pandemic levels again by the end of this year.
Finally, switched transactions (the total number of transactions processed through Mastercard’s networks) jumped 27% in the fourth quarter.
Turning to profitability, Mastercard reported $2.35 of non-GAAP (adjusted) diluted earnings per share (EPS) for the fourth quarter. Compared to the prior year period, this equates to a growth rate of 43.3%. That beat analysts’ forecast of $2.21 for the quarter, which was the ninth of the past 10 quarters the company has done so.
Mastercard’s higher revenue base and a 450 basis point year-over-year increase in net margin to 44.4% were responsible for the company’s fourth-quarter profit surge.
Promising sector outlook should support growth
Mastercard closed 2021 with an excellent quarter. And based on analyst forecasts that Mastercard’s annual earnings growth will increase from 19% over the past five years to 25% over the next five years, the company’s growth is set to continue. Why do analysts think this will be the case?
As the world becomes digital and online shopping continues to grow, so does the need to adapt payment methods. This is expected to result in the continued displacement of cash used to conduct financial transactions. This is precisely why forecasts predict that the global payments market will grow by around 7% per year, from $1.5 trillion in 2020 to $2.9 trillion by 2030.
Simply put, Mastercard’s size and scale in an expanding industry should bode well for the company’s growth potential.
The score is almost perfect
Another attractive feature of Mastercard is its sound financial position.
Mastercard’s net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio was 0.5 last year ($6.01 billion net debt/$11.46 billion EBITDA). This demonstrates that Mastercard is using debt responsibly, reducing its risk of bankruptcy to virtually zero for the foreseeable future.
Mastercard is a reasonably valued growth stock
Even if Mastercard stock is unchanged since the beginning of the year compared to the S&P500down 8% during this period, the stock seems to be priced rationally.
Indeed, although Mastercard’s forward price/earnings ratio of 28.7 is well above the credit services industry average of 14.7, the multiple appears to be justifiable. This is because, unlike many other companies in its industry, Mastercard does not extend credit directly to customers and is more resilient to recessions. And given Mastercard’s annual earnings growth forecast of 25%, the price-to-earnings growth ratio seems right at 1.1.
Mastercard’s 0.5% dividend yield is also slightly above its 13-year median, further confirming that the stock is reasonably valued at present.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.