Mastercard: Its Dominance Will Be Tested

Credit services company Mastercard (MA) is one of many stocks that have pulled back in recent months. The broader market hasn’t been too strong relative to its October performance, as Omicron variant worries continued. Certainly, a double-dip growth-targeted pullback induced by COVID-19 and higher rates seems to be in the works.

Although Mastercard is a solid growth company in one of the most beaten-down areas (payments) of the market this year, it is interesting right now at about 12% off its peak. That said, there is a reason why MA stock is right back at its early-2020 high. 

Things could get uglier for fintech firms engaged in the payments space. Just have a look at PayPal (PYPL), which nearly saw its share price get cut in half.

Undoubtedly, Mastercard wasn’t nearly as expensive as PayPal at its peak, but both names could sink together as new payments players stand to weaken their moats.

For now, I am neutral on Mastercard stock. More or less, shares seem fairly valued here, given recent concerns and potential headwinds that could persist into 2022. (See Analysts’ Top Stocks on TipRanks)

Disruption in the Payments Space Could Continue to Weigh on Mastercard

There’s a lot of disruption in the fintech space right now, and there are fears that hefty margins enjoyed by credit card companies for many years may be in jeopardy.

Undoubtedly, Buy Now Pay Later (BNPL) is a hot trend in the fintech space, promising no interest on payment plans based on fixed installments. For consumers, it’s a great deal versus the incredibly high interest on credit card debt, arguably one of the priciest debts to have aside from pay-day loan debt.

With digital retail kingpin Amazon (AMZN) previously remarking on high fees on Visa (V) cards, retailers could side with consumers as up-and-comers duke it out in the payments space in what could become a race to the bottom in terms of rates charged on consumer debts.

I view the rise of BNPL firms and ongoing disruption in the payments space as a potentially long-lasting headwind that could continue to weigh on many incumbents.

While credit card issuers have created their own BNPL offerings, such moves are unlikely to stop the erosion of margins in credit cards that have helped firms like Mastercard and Visa grow earnings at an enviable pace over the years.

Wall Street’s Take

Turning to Wall Street, MA stock comes in as a Strong Buy. Out of 12 analyst ratings, there have been 12 Buys assigned in the past three months.

The average Mastercard price target is $436.00, implying 22.9% upside potential. Analyst price targets range from a low of $380.00 per share to a high of $494.00 per share.

The Dominance and Moats of Credit Card Companies Will Be Tested

Given Mastercard is smaller than Visa and has shown intriguing, innovative capabilities on a relative basis, I favor MA stock over V. That said, I’m still not too enthused about the valuation, even after a 12% pullback.

Both firms will need to play defense in an industry that’s starting to get crowded. While credit card companies, especially Mastercard, are more than capable of playing effective defense to keep rivals at bay, the trend isn’t at all ideal.

Add uncertainties regarding consumer spending habits into what looks to be an Omicron-plagued coming year into the equation, and it’s tough to get behind a pressured name like Mastercard here.

Recently, Wedbush cut its MA stock price target to $380 from $400, citing “choppy consumer spending” as a primary reason. The firm still has a Buy rating on Mastercard, but the reasons behind the price target downside were concerning.

Mastercard’s spending volume has been strong in the past, but such trends could weaken, especially if Omicron brings more lockdowns in 2022.

Disclosure: Joey Frenette owned shares of Amazon at the time of publication.