Forget PayPal, Now’s the Time to Buy Mastercard Stock

We all know PayPal (NASDAQ:PYPL) has been an amazing stock. With consumers flocking to ecommerce and the company now a crypto play, there appears to be no end in sight to growth. But there’s a better way to play the digital payments space right now: Mastercard (NYSE:MA) stock.

Close up of a pile of mastercard credit load debit bank cards.

Source: David Cardinez / Shutterstock.com

The credit card company is not just a derivative play on the explosive digital payment trend. It’s also an excellent early way to play the broader global economic recovery. While it won’t grow nearly as fast as PayPal, that won’t matter when consensus earnings forecasts are well below pre-pandemic levels.

When it comes to Mastercard, investors are clearly overblowing the competition and underestimating the potential for earnings to rocket when travel recovers.

Don’t just think of this as a short-term trade. MA stock has some of the best attributes I like in a long-term holding. It has a strong defensible market position, great operating strategy, high margins, low debt and plenty of cash.

Even a Little Travel Goes a Long Way for MA Stock

It’s clear that consumers aren’t traveling yet. But a return to normalcy will benefit MA stock more than people expect. Because the firm earns far higher margins on international, or cross-border card transactions, any pickup will disproportionately impact Mastercard’s bottom line. Vaccine rollouts will ease border restrictions and increase discretionary spending, setting up for improvement in the next two quarters. Normalized growth should resume in 2022.

Current Street forecasts model a sanguine view on travel. With the company facing easy year-over-year revenue and earnings comparisons, Mastercard stock is positioned for upside. Even a halfway return to pre-pandemic levels means the firm will beat Street revenue estimates by 3-5%, implying earnings upside of over 30 cents per share.

Meanwhile, PayPal won’t see the same tailwinds. Much of the tech giant’s business comes from ecommerce, which doesn’t benefit the same way from reopening economies and pent-up travel demand. For PayPal to sustain its premium valuation, the company must beat aggressive growth projections amid tougher growth comparisons. It also faces the added pressure of expanding its digital wallet outside of payments into new growth areas.

Big Tech, Fintech: Don’t Believe the Hype

Not only is the Street setting the bar too low for revenue and earnings, but it’s also being overdramatic about the competition.

There’s ample fear that big-tech players like Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) are moving directly into payment processing technology and will cut Mastercard out of the payment loop.

The same goes for fintechs such as Square (NYSE:SQ), Alibaba (NYSE:BABA) and PayPal.

All of this concern is overblown. As one of the biggest players in the global payments industry, Mastercard enjoys a global duopoly in card processing with Visa (NYSE:V). That’s a position that isn’t likely to be displaced by PayPal and other fintechs. Tech companies are much more focused on adopting new technologies such as 5G to improve consumer experience, making them less likely to break away from Mastercard’s digital rails.

For example, if you look closely at Apple Pay, the new pay feature built into iPhones, you’ll see it’s just another way to make payments on Mastercard’s existing payment network.

A Secret Worth $185 Trillion

Here’s another important growth area that’s not getting any attention. With investors obviously focused on a consumer spending recovery, the biggest potential swing factor to Mastercard’s growth over the next few years has been largely ignored: New Payment Flows. These are other types of payments outside of the company’s core Consumer-to-Business (C2B) market, representing around $185 trillion in payments — more than 5x bigger than the C2B market.

The company’s biggest growth bet is Mastercard Track, a platform for processing electronic B2B payments. This service promises real-time (Fast ACH) and push payments between buyers and suppliers. The business payment service has been so successful that the government of Canada recently chose Mastercard for its real-time payment system. The company “now … [provides] real-time payments infrastructure for 12 of the top 50 GDP countries, with the potential to become the PayPal of a vastly larger business market.

The conservative case here is that this business provides a nice ancillary revenue stream, with the potential to become a huge source of upside.

Mastercard Is Cheap with Low Expectations

Mastercard trades at just over 30x 2022 earnings. That’s in line with current earnings growth projections, which are still well below pre-pandemic forecasts. Estimates will likely prove too low with any acceleration in vaccine rollout, travel and higher card adoption in brick-and-mortar stores.

Applying a conservative 40x pre-pandemic multiple (below PYPL at over 70 times) to 2022 estimates provides a clear path for the shares to break $400. With Mastercard stock set up for earnings and revenue upside, and given its potential to conquer a massive B2B payments market, MA is the best value play on the digital payments space and poised for a strong comeback.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.


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