What we think about Mastercard (MA)
Mastercard in Three Words: Payments, Network, Tollbooth
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Background
Mastercard is one of the world’s largest financial tollbooths, with a payments network that collects a small percentage of each transaction made. While it must lay out the infrastructure for this vast network, the billions of transactions made on it give Mastercard an incredibly lucrative business model and very strong competitive advantages.
In its 2023 third quarter, Mastercard’s revenue rose to $6.5 billion, a 14% increase year over year, and adjusted EPS grew to $3.39, a 26% gain over the prior corresponding quarter. Operating margin was a stunning 58.8%, up 120 basis points over Q3 2022. Given Mastercard’s scale, we can believe that its best growth days are behind it. Nothing is further from the truth.
The shift to digital payments is still in its early days, especially in the global context, and Mastercard as the second biggest card network network is well-placed to benefit as a toll booth operator. The benefits of Mastercard’s scale and unique technology is reflected in those juicy operating margins in the financials. But a big contributor to these high levels of profits is the card network duopoly between Mastercard and its bigger brother Visa.
While the duopoly in this business means wonderful financials, it also comes with increased global regulatory scrutiny, and the low probability of disruption because of regulatory changes. On balance, however, investors with a long time horizon are likely to do well with a compounder like Mastercard.
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