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Diversified Business Aids Mastercard's (MA) Long-Term Growth

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Though the COVID-19 pandemic is affecting Mastercard’s Inc. (MA - Free Report) business drivers in the short term, its diversified revenue streams and focus on strategic initiatives bode well for the long haul.

Over the years, Mastercard used acquisitions to supplement its organic efforts and diversify its revenues. Most buyouts of the company focused on areas, such as data analytics, cyber and intelligence, loyalty and costs in developing multi-rail solutions for its customers. This helped expand its addressable markets, drive new revenue streams and strengthen core product solutions.  Some of the recent takeovers are Vyze, Nets, RiskRecon, Finicity, et al. Acquisitions contributed about 1 ppt to the company’s 2020 revenues.

Organic growth remained a key catalyst for Mastercard as evident from the revenue CAGR of 13% from 2010 to 2019. It was, however, down 8% in 2020 due to a decline in transactions and volumes, stemming from the effects of border restrictions and social-distancing measures. Despite this temporary downside, we believe, the company’s revenues are set for strong growth, given its solid market position and an attractive core business that continues to be driven by new deals, renewed agreements and an expansion of service offerings. Ongoing initiatives including digital strategy and a continued widening geographic footprint create further optimism.

The COVID crisis accelerated the use of electronic modes of payment with increasing adoption of digital and contactless solutions. The digital form of payments is expected to sustain beyond the pandemic. Key trends include preferences for contactless transactions, rapid adoption of e-commerce, a growing aversion to cash, merchant requirements for omnichannel acceptance and a need to automate business-to-business payments. Each of these provides an opportunity for the company’s business to expedite its shift to digital channels of payment.

The COVID-19 woes drove demand for the company’s service offerings including cybersecurity and data analytics capabilities. The service suite comprises differentiated solutions that are valued by a wide variety of customer segments and provide the company with a level of revenue diversification. This became particularly evident amid the COVID environment as the company’s slew of service lines grew much faster than its core operations in  2020.

Mastercard has been successfully generating cash flow from operations over the year, which encourages capital management via share buybacks and dividend payouts. In December 2020, the company hiked its quarterly dividend by 10% and also authorized a $6-billion worth share repurchase program. We believe, the company will continue generating favorable cash from operations on the back of its growing business volumes. Its strong capital position also enables it to pursue acquisitions for aiding inorganic growth.

However, the company has been incurring escalated costs under rebates and incentives (it is a contra revenue item) over the past many years to win customers and businesses. The same was up 4% in 2020.  We believe, rising client incentives will put pressure on the company’s net revenues.

The company also suffers weak cross-border business. International markets provide growth and diversification benefits to Mastercard. Bulk of the company's revenues is generated from international regions, such as the Asia-Pacific, Canada, Europe, Latin America, Africa and the Middle East. However, due to COVID-led restrictions on travel and entertainment, the cross-border volumes will remain suppressed. In 2020, cross-border payment volumes were down 29% year over year. Though this decline is gradually moderating, it remains to be seen when the metric rebounds.

The stock has inched up 1.3% in the past three months compared with its industry’s growth of 0.9%.

Other stocks in the same space including American Express Co. (AXP - Free Report) and Discover Financial Services (DFS - Free Report) have also gained 11.3% and 21.5%, respectively. However, Visa Inc. (V - Free Report) has slipped 0.4%.

The stock currently carries a Zacks Rak #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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