“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – Warren Buffett.

Mastercard’s 30.13% return vs the S&P 500’s 3.60% over the past twelve month [Source: Yahoo Finance]





-MasterCard, often under the radar, has been and continues to be a dream buy and hold stock. The best businesses are often the boring ones.

-MastetCard’s pricing power and fantastic profitability is underpinned by its network which has been sixty years in the making

-Despite its size, MasterCard continues to enjoy robust accelerating revenue growth fueled by trends that have a long way to run.

-MasterCard Stock Forecast: I Know First Algorithm is currently bullish on MA

MA’s new 2018 wordless logo



It is exactly thirteen years since MasterCard went public. At the time of its IPO, MasterCard was already the second-largest credit card issuer in the world. and its network was forty years in the making by 25 000 MasterCard-issuing financial institutions who owned MasterCard in a collective until its IPO. The motivation behind the IPO was not to raise additional funds for the perennially highly profitable MasterCard. Rather it was the desire to change the ownership structure, and separate out this business from the core business operations of its owners so that the market could properly value MasterCard in an uncontaminated way, and also attribute continual anti-trust lawsuits against MasterCard to the MasterCard brand only. How seldom it is that public equity investors enjoy exposure to what was already such a well-established low risk high return business at listing time – often businesses this great are kept private.

MA’s 5182.50% return vs the S&P 500’s 120.63% since its 2006 IPO [Source: Yahoo Finance

Indeed those who bought into MasterCard at IPO have watched the value of the company’s equity reach $255bn, from $5.6bn at listing. They have been rewarded for their recognition of the rarity that is the opportunity to participate in ownership of a global, highly scalable, high volume, high margin business. A global brand whose unrivaled already-paid-for network with minimal marginal cost to add new users was so entrenched at IPO time (except for duopoly competitor Visa’s) that only 40 years and 25000 financial institutions could have put in place such remarkable network effects.

Master Charge logo used from 1969 to 1979, featuring the original Interbank logo of 1966

This was always a stupendous company that today boasts approximately 900 million cards issued in over 200 countries. MasterCard’s original business was already profitable in 1961, three years after its launch date. Bank of America kept the profitability under wraps early on so as not to encourage competitors. The quick profitability of the business should not be a surprise, being so capital light once the initial investment to get the network up and running is made – the marginal cost of additional revenue is negligible, and MasterCard does not actually lend funds.

The business is even better since listing due to a few important drivers of revenue growth that have a long way to run, and which will underpin returns to investors that well outperform the market.

MasterCard’s Moat

As already mentioned, it took forty years and 25000 banks to build MasterCard’s remarkable network. By 2006, the listing date, the network was already so entrenched and dominant, along with Visa’s, that MasterCard had already faced many anti-trust litigation suits – by potential competitors, ATM operators, merchants and competition authorities. Indeed a foundation was launched at the same time as the listing, arguably for public relations purposes.

The profitability of the business continues to resemble a situation that every other business the world over can only dream about.MasterCard has had to make a concerted effort to keep the operating margin from every $1 of revenue from not exceeding 60c, which proves difficult since MasterCard’s cost base can continue to become ever more efficient – it essentially operates a data center and private telecommunications network that has virtually no incremental cost for each additional user that is added.

And on the revenue side, the MasterCard and Visa duopoly market power allows for the raising of or maintenance at current levels of interchange fees across many jurisdictions. In markets where MasterCard faces more aggressive regulators, such as the European Union, some fees are facing pressure, but MasterCard has faced many lawsuits before, and the tailwinds of growth expanded on later in this article more than offset these issues.

Interchange fees incentivize banks to issue more MasterCard branded debit and credit cards, and banks in turn convince customers to take up the cards by offering loyalty points, insurance and other perks. The interchange revenue is besides the revenue banks earn from any card fees and interest they charge the cardholder. The durability of the MasterCard business is ensured by the way revenue from a transaction is split between it and the banks. MasterCard only takes a few basis points from each transaction and the vast majority goes to the banks instead. This durability is further demonstrated by the ability of MasterCard and Visa ensure a capital light business model and avoid lending funds themselves, and nevertheless still withstand competition from three-party card schemes like American Express that actually lend themselves.

Any investor that writes off MasterCard as an old-school operation that is susceptible to being left behind by new tech names stands to lose a lot of upside. MasterCard continues to forge partnerships with leading brands, for example the recently announced Apple credit card in partnership with Goldman Sachs. And its partnership with Samsung to develop a new digital identity security platform for smartphone devices, allowing consumers to verify their identify via bio-metric data or a single user ID in place of multiple log-in details.

Indeed the growth of payments using mobile phone tapping is no threat – Apple Pay runs via the MasterCard and Visa payment networks. MasterCard is also growing its impressive data business and has recently done a deal with Google that is expanded upon in the next section.

Apple, Facebook, or Amazon for that matter, could in theory attempt to bypass the payment networks and facilitate exchange of value within their large own networks of users. However as per the recent media on the topic in the context of Facebook’s future plans, such a move would require creation of a new store of value of currency within the network, as the payment network ( MasterCard or Visa) linking fiat currencies in bank accounts to the users within the network would be missing. For example before Apple Pay can be used by a mobile phone user, the Apple Wallet needs to be linked with a credit or debit card to retrieve the funds in the user’s bank accounts. So while Apple Pay does provide a faster payment service at the merchants that accept it (some of whom recently stopped accepting it), that is only after funds have already reached the Apple Wallet from banks via the Mastercard and Visa payment networks,

Indeed with regard to newly developed stores of value, the Bitcoin network can process fewer than a dozen transactions per second, compared to Visa or MasterCard networks which can process 65000 per second. The point at which the MasterCard network will be threatened will be when the entire banking infrastructure together with fiat currency is rendered redundant by some superior technology. For now that is a long way off, since there already exist new technological methods by which payments can be remitted without relying on the existing banking and Mastercard and Visa payment networks, but they are simply not in widespread use, in large part due to regulators seeking to maintain the status quo so they can control taxation and fiat currency in order to fund government expenditure. In the meantime MasterCard benefits and it continues to grow its revenue very impressively for a number of reasons.

Mastercard’s Accelerating Revenue Growth

Source: Yahoo Finance

The Digitization of Money

The use of cash is declining in many markets. Mostly this has to do with convenience and technology. Many people are using ride-sharing apps for example, instead of taxis. The apps by default offer payment by credit or debit card. The proportion of merchants that only accept cash is also declining as technology enables tax authorities around the world to far more accurately monitor tax evasion. The network effect means that as fewer merchants are left accepting cash only, the remaining merchants that do still only accept cash feel compelled to also accept cards, lest they miss out on business .



Retail e-commerce sales worldwide from 2014 to 2021 (in billion U.S. dollars)

[source: Statista]

The rise of e-commerce has contributed to the move towards use of credit and debit cards and away from cash for obvious reasons – there is no longer a physical interaction between the merchant and the consumer. What is interesting is that the MasterCard and Visa payment networks predate the internet, where ever more transactions are occurring. Online payment volume may exceed $50 trillion by 2026, according to Goldman Sachs, generating more than $200 billion fees (up from $85 billion in fees in 2016). Only 10% of retail sales took place online in 2018, a figure that Julius Baer expects will climb to 18% by 2021. Expectations are for an eventual 50% market share for e-commerce vs bricks and mortar, so there is a long runway for growth.

Traveling has increased greatly and continues to do so thanks to cheaper airfares and a growing middle class in many developing countries. Due to the high cost and inconvenience of exchanging cash currency, particularly for lower amounts that individual travelers require, credit or debit card use during travel is much more convenient. Travelers also prefer not to be carrying around with them large amounts of cash, particularly when they are in an unfamiliar city. So a secular rise in travel activity has lead to a secular rise in the use of MasterCard products.

International Tourist Arrivals Worldwide 1996 to 2007 [source: Statista]

Convergence of Incomes Globally and India

Due to globalization of capital and labor for many industries, there is a convergence of incomes around the world and a growing consumer class becoming banked. The world’s population is also growing. A growing consumer class globally with a fixed number of payment networks such as MasterCard and Visa is great news for MasterCard.

MasterCard intends to invest $1bn over the next five years in the vibrant and growing Indian market as the size of the mobile-phoned-banked consumer class explodes there, and India transitions to e-commerce from street-market shopping, and largely skips bricks and mortal retail. The value of digital transactions in India will be worth over $1 trillion by 2025. Moreover, as users from rural and semi-urban areas increasingly make purchases on their mobile phones, the user base is expected to increase from 90 million in 2018 to 300 million by 2020. The MasterCard CEO understands this market well as he is of Indian background – a great advantage.

The only other market larger than India’s is China’s, but so far Visa and MasterCard have been shut out of China to protect Unionpay, which actually has more cards than even Visa. So there is only upside to come when and if MasterCard is let into China in the future. This seems unlikely at the moment. By the same token trade tensions between the US and China may impact MasterCard less since it has no presence in China and its stock may be expected to outperform on a relative basis until the trade tensions as a source of secular depression for the equity markets dissipate.

Data

MasterCard essentially operates a data center. The value of data that MasterCard collects is difficult to value. The fulsomeness of the data is impressive. For example the MasterCard Global Destinations Cities Index provides average stay duration and average spend per stay, in addition to the number of overnight international visitors for 162 major tourist destinations. This is just one industry and data point that is being collected. Mastercard through its Data & Services business is selling data to companies including Google. Google in 2017 introduced a service to ad-buyers where they provide confirmation as to whether a user that engaged with an ad subsequently made a purchase within 30 days.

Travelers on the London underground network can now conveniently travel by tapping their MasterCard contact-less debit or credit card at stations when boarding and leaving, and there is no need to purchase a train ticket at the booth. Following their travel, their card details allow the system to detect if they should be charged for a daily ticket or a single, and what zones they traveled through. The ubiquity of MasterCard meant this was possible to offer, and demonstrates the breadth of data-collection possibilities for MasterCard.

London Underground Logo

Final Thoughts

MasterCard’s dominance and pricing power is underpinned by the network effect and the duopoly with Visa globally – aside from China where Unionpay has the market. Of course there are other very high margin businesses, but there are few if any businesses that are as scalable with as secure a moat. The amounts of money going through the payments systems have been boosted since MasterCard listed in 2006, due to a number of super-trends: a more globalized economy, with more people in developing countries joining the payment networks as their incomes converge to developed economy levels, as well as the secular global growth of travel, e-commerce, and the transition away from cash as a result.

MasterCard is indeed the holy grail of a high margin, high volume, highly scalable business whose moat is secured by the network effect. Again, such a network could have only been built by 25000 banks over four decades, and since MA’s 2006 IPO, public equity investors have been lucky enough to gain exposure to such a remarkable business. The point at which the MasterCard network will be threatened will be when the entire banking infrastructure is rendered redundant by some superior technology. For now that is a long way off, and in the meantime the use of MasterCard is growing due to a number of super-trends that still have a long way to run.



MasterCard Stock Forecast: I Know First Algorithm is currently bullish

My bullish endorsement for MasterCard is backed by the positive algorithmic forecasts from I Know First. The 1 month, 3-month and 12-month algorithmic MasterCard Stock forecasts are all positive. The underlying future trend is that this stock is likely to go up in price.

Past I Know First success with MA

I Know First has been bullish on MasterCard’s shares in past forecasts. On 19 July, 2016, the I Know First algorithm was reinforced by a bullish article on MasterCard with the one month, three month and one year forecasts for MA all bullish. The algorithm successfully forecast the movement of the MA share. Over the next twelve months, shares rose by 38.27% in line with the I Know First algorithm’s forecasts, compared with 26.78% for the NASDAQ and 14.33% for the S&P 500.

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Please note-for trading decisions use the most recent forecast.



