/global%20technology%20internet%20globalization.jpg)
The market now has growing expectations for an economic soft landing for major economies, including the U.S., and financial markets are also pricing in the end of interest rate hikes. This is ideal both for the valuations and earnings outlooks for companies in growth businesses, such as payments.
One such company is Mastercard (MA), which has recently seen its share price approaching all-time record highs. MA is up close to 20% year-to-date.
Let’s take a closer look at the company, and how it is both an inflation hedge and an artificial intelligence (AI) play.
Mastercard’s Booming Business
Mastercard is perceived by Wall Street as an inflation hedge. Think about it - the company takes a percentage of every transaction conducted on its network. So, as prices rise, so does its revenue.
Add to this the resilient state of U.S. consumers and the ongoing shift to cashless transactions, and it’s easy to see why Mastercard’s stock has been in a steady upward trend over the last year.
Between a quarter and a third of global payments go through Mastercard’s network. This makes it the second-largest such business behind Visa (V). Mastercard doesn't provide credit cards; it simply gives access to the payment network the cards work on.
The genius of these two businesses is the network effects. Payments companies are beneficiaries of scale, as banks and merchants sign up to transact between each other.
Mastercard's success can be seen in its numbers. It enjoys substantial profit margins - in the latest quarter, its adjusted operating margin was 58.8%. This is near record highs, an increase of 1.2 percentage points year on year, and compares favorably to almost every other company in the S&P 500.
The latest jump in profit margin was due largely to the global travel rebound providing a one-fifth increase in higher-margin cross-border transactions. Cross-border revenues make up around 35% of total revenue at Mastercard, compared with 25% at Visa.
Its most recent quarterly results also showed the strength of Mastercard’s business in other ways. It doesn’t need to spend much to scale up. Last quarter, revenue rose 11% on a constant currency basis, yet its operating expenses were flat. This combined to push up operating profit by 21% year on year, with diluted earnings per share increasing 29%.
Mastercard and AI
To diversify its business away from being just a proxy for consumer spending, Mastercard has been prioritizing “value-added services and solutions." This includes fraud management, data analytics and other consulting services.
The company will benefit greatly from the use of AI. The opportunities in AI for payment businesses center around more robust fraud detection, personalized user experiences, and automated customer support. Of these opportunities to improve its business, using AI in detecting fraud is the most important.
Already, Mastercard estimates it has thwarted $35 billion worth of fraud in the last three years, primarily by utilizing AI technologies to spot authorized push payment (APP) scams. This is where criminals con consumers to send them money by posing as legitimate entities.
For one great example of what Mastercard is doing with AI, let's look across the pond to the U.K. and nine major British banks. The payments giant has launched its Consumer Fraud Risk technology in the U.K., using large-scale payments data to help identify scams before funds leave a victim’s account. The tool builds on insights from Mastercard’s work with U.K. banks to follow the flow of money in accounts over the last few years.
It overlays this information with specific analysis factors - account names, payment values, payer and payee history, and the payee’s links to accounts associated with scams. This provides banks with the data necessary to intervene in real time and stop a payment before funds are lost.
Mastercard says that the system could have a significant impact on the aforementioned APP fraud, which has been rapidly rising in recent years and now accounts for 40% of U.K. bank fraud losses. The company estimates such fraud could cost $4.6 billion in just the U.S. and U.K. by 2026.
Fraud detection is just one service that gives Mastercard a chance to upsell more services to banks that already use its transaction services. At the same time, when Mastercard is competing for new business, the services strategy gives it a way to try to differentiate itself from the other payment providers.
So far, things are progressing well: last quarter, value-added services revenue rose 14% on a constant currency basis. This is a major reason why the company has been consistently growing its top line faster than rival Visa.
Is MA a Buy at Current Levels?
With Mastercard emerging as a leader in leveraging AI use cases in its business, it makes the company one of the prominent, but undiscovered, beneficiaries of AI.
I believe Mastercard is a difficult company to ever bet against. Since 2017, its revenue has doubled. Going back to 2011, it is up 338%. In other words, it has been a high-margin compounder over a long period of time.
Businesses like this are rare, and you usually have to pay up for them. Mastercard’s valuation is high, but not unreasonable. FactSet has it trading on 28 times its forward earnings.
MA stock is a buy anywhere below $418.
On the date of publication, Tony Daltorio did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
