Mastercard Incorporated (MA) is a leading transaction processing company operating globally. Founded in 1966, it is one of the two most popular financial services companies, with a $353.05 billion market cap. More than 25,000 financial institutions globally issue Mastercard branded cards. According to Refinitiv data, MA’s operating margin was the ninth highest in the S&P 500 index. It is ranked #204 on the Fortune 500 list. The stock has gained 14.1% over the past month.

Here’s what could shape MA’s performance in the near term:

Lower Institutional Investor Stake

Renowned institutional investor Warren Buffett reduced his stake in MA by 6% in the fiscal third quarter. As of September 30, 2021, Buffett's Berkshire Hathaway holds 4.3 million shares of MA, accounting for 0.5% of his portfolio.

This sell-off by one of the most successful institutional investors of all time might indicate fundamental weakness in the company, which has lagged the broader market over the past year. Shares of MA gained 0.7% versus S&P 500’s 27.2% returns over this period.

Moreover, its hasty exit from India is expected to affect its financials. The company counted India as its key market and was set to invest $1 billion over five years.

Stable Growth Prospects

Street expects MA’s revenues to rise 25.4% in the current quarter (ending December 2021), 23.1% in the current year, and 19.7% next year. The company’s EPS is expected to rise 34.8% in the fourth quarter, 28.5% in full year 2021, and 27.5% in 2022. In addition, analysts expect MA’s EPS to rise at a 26.2% CAGR over the next five years. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.

Stretched Valuation

In terms of forward non-GAAP P/E, MA is currently trading at 43.52x, 72.6% higher than the industry average of 25.21x. Its forward non-GAAP PEG ratio of 1.75 is 1.5% higher than the industry average of 1.72.

In addition, the stock’s forward Price/Sales and Price/Cash Flow multiples of 18.74 and 40.14 are significantly higher than industry averages of 4.14 and 24.18, respectively. Its EV/EBITDA of 33.13 is nearly double the industry average of 16.68.

Consensus Rating and Price Target Indicate Potential Upside

Each of the 12 Wall Street analysts that rated MA have rated it Buy. The 12-month median price target of $436.00 indicates a 21.3% potential upside from the last closing price of $359.32. The price targets range from a low of $380.00 to a high of $494.00.

POWR Ratings Reflect Uncertainty

MA has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

MA has a grade of C for Stability and Quality. The stock’s relatively high 1.12 beta is in sync with the Stability grade. In addition, MA’s trailing-12-month ROA of 22.86% is 531.9% higher than the industry average of 3.62%. However, its trailing-12-month asset turnover ratio of 0.53% is 16.9% lower than the industry average of 0.64%, justifying the Quality grade.

Of the 54 stocks in the C-rated Consumer Financial Services industry, MA is ranked #24.

In total, we rate MA on eight different levels. Beyond what we’ve stated above, we have rated MA for Growth, Momentum, Sentiment, and Value. Get all MA ratings here.

Bottom Line

The transaction processing market is dominated by the duopoly of MA and Visa, Inc. (V). However, the increasing online financial transactions and development of digital currencies are signaling a change in financial services and transaction processing markets, increasing competition for both MA and V. Also, MA’s exit from India, which was a key market for the company’s growth, might have an adverse financial impact on its revenues. Thus, investors should wait until MA outlines its growth objectives before investing in the stock.

How Does Mastercard Incorporated (MA) Stack Up Against its Peers?

While MA has a C rating in our proprietary rating system, you might want to consider looking at its industry peers, Atlanticus Holdings Corporation (ATLC), OneMain Holdings, Inc. (OMF), and Discover Financial Services (DFS), which have a B (Buy) rating.

MA shares were trading at $365.49 per share on Monday morning, up $6.17 (+1.72%). Year-to-date, MA has gained 2.90%, versus a 29.05% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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