In the current economic landscape, marked by expectations of an economic soft landing and the anticipation of the end of interest rate hikes, companies in growth sectors, particularly payments, are poised for favorable valuations and earnings outlooks. Mastercard (NYSE:MA) stands out as one such company, experiencing a year-to-date surge of 20%.
Mastercard’s business model positions it as a perceived inflation hedge, as it garners a percentage from every transaction on its network. With rising prices, its revenue sees a corresponding increase. The company, operating in a resilient U.S. consumer market and benefiting from the shift to cashless transactions, has witnessed a steady upward trend in its stock over the past year.
Between a quarter and a third of global payments flow through Mastercard’s network, making it the second-largest player in this sector, just behind Visa (NYSE:V). Notably, Mastercard focuses on providing access to payment networks rather than issuing credit cards.
The success of Mastercard is attributed to network effects, with payments companies benefiting from scale as more banks and merchants engage in transactions through their network. The company boasts substantial profit margins, with a recent adjusted operating margin of 58.8%, nearing record highs and surpassing many S&P 500 counterparts.
Mastercard’s strategic move towards “value-added services and solutions” includes initiatives in fraud management, data analytics, and consulting services. Embracing artificial intelligence (AI) has become a crucial aspect of its diversification efforts, with AI contributing to more robust fraud detection, personalized user experiences, and automated customer support.
AI has proven instrumental in fraud prevention, with Mastercard leveraging technology to thwart $35 billion worth of fraud over the last three years, primarily focusing on detecting authorized push payment (APP) scams. The company’s Consumer Fraud Risk technology, implemented in the U.K., utilizes large-scale payments data to identify scams before funds leave a victim’s account.
Mastercard’s AI-driven services strategy not only enhances fraud detection but also creates opportunities to upsell more services to banks already using its transaction services. Last quarter, value-added services revenue increased by 14% on a constant currency basis, contributing to Mastercard consistently outpacing rival Visa in top-line growth.
While Mastercard’s valuation is relatively high, trading at 28 times forward earnings, its consistent revenue growth and strategic AI-driven initiatives position it as a strong contender in the market. The stock is considered a buy opportunity at levels below $418. With its track record of doubling revenue since 2017 and achieving a 338% increase since 2011, Mastercard remains a compelling and rare high-margin compounder in the industry.
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Author Stephanie Bédard-Châteauneuf 
