Mastercard: Getting Closer To A Buy Despite Recession Risks

Sep. 26, 2022 9:42 AM ETMastercard Incorporated (MA)11 Comments

Summary

  • Mastercard's wide moat and robust profitability are critical factors that are fundamental to its execution prowess. Therefore, it has continued to gain operating leverage robustly.
  • MA stock was clearly in overvalued zones in early 2021. However, its growth premium has been digested meaningfully as it consolidated over the past fifteen months.
  • We assess that Mastercard's proven execution capability could help it weather the coming recession. However, MA stock's valuation remains well-balanced at best.
  • We discuss why we believe a steeper discount is still necessary to de-risk MA's execution risks further. We also discuss the critical levels for investors to watch.
  • I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
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Thesis

Leading payments technology company Mastercard's (NYSE:MA) stock has been somewhat of an enigma for investors. Despite its wide competitive moat and robust profitability, MA has struggled to gain upward momentum since staging its highs in April 2021. MA attempted to re-test that high again in February 2022, but sellers rejected its buying upside decisively.

We believe MA's sluggishness over the past 15 months is justified. The post-COVID surge sent it into well-overvalued zones in 2021. Therefore, the market needs a distribution zone to digest MA's remarkable recovery while allowing the company to prove the robustness of its execution over time.

Our analysis suggests that MA's growth premium has been digested significantly. Moreover, the improvement in its valuation proves the competitiveness and solid profitability of its business model. Therefore, we believe the secular growth drivers underpinning Mastercard's highly-diversified business remains intact.

We postulate that MA seems well-balanced heading into a potential recession, which could weaken consumer discretionary spending further. As a result, we require a steeper discount to its current valuation to further de-risk its execution risks through the cycle.

MA's price action has also moved into a critical juncture on its long-term chart. Given the distribution, it has already lost its medium-term bullish bias but is still supported above its long-term moving averages. We also gleaned that a potential bullish reversal could occur over the next couple of months if buying support returns to deny further selling downside.

Therefore, we believe it's appropriate to reiterate our Hold rating, giving more allowance for Mastercard to prove its execution through the coming recession.

MA Stock's Valuation Is More Well-Balanced Now

MA Stock NTM EBITDA multiples valuation trend

MA NTM EBITDA multiples valuation trend (koyfin)

As seen above, MA's remarkable recovery from its March 2020 COVID lows helped send it into overvalued levels in early 2021, at the two standard deviation zone above its 10Y mean.

Therefore, we aren't surprised that MA has failed to gain upward traction over the past fifteen months, as the market needed to distribute its massive gains. Furthermore, coupled with the normalization of its post-COVID growth, we believe the digestion is justified despite its robust profitability.

However, we assessed that MA is no longer overvalued, as it continues to gain operating leverage. Notably, it has reverted to its 10Y EBITDA multiples mean. However, the market could de-risk MA further to improve its valuation, given the looming recession. Hence, we believe an entry level with an adjusted EBITDA multiple of about 18x may be appropriate, implying a downside of about 10% from the current levels.

It Also Depends On Mastercard's Execution Through The Recession

Mastercard Adjusted net revenue change and Adjusted EBIT change consensus estimates

Mastercard Adjusted net revenue change % and Adjusted EBIT change % consensus estimates (S&P Cap IQ)

The consensus estimates (bullish) are confident that Mastercard's recovery through the cycle remains intact as its growth normalized from the post-pandemic reopening.

Management's commentary from its recent conference suggests that Mastercard is cautiously optimistic about the strength of the consumer, despite worsening macro headwinds.

Therefore, the signals are pretty mixed for investors to assess as we need more data to evaluate whether consumer discretionary spending could weaken markedly through the coming recession.

Moreover, a weaker consumer will likely impact its operating leverage, reducing its profitability estimates and affecting its EBITDA multiples. Therefore, we posit that the market could likely de-risk MA's valuations further to factor in these uncertainties.

Is MA Stock A Buy, Sell, Or Hold?

MA stock price chart (monthly)

MA price chart (monthly) (TradingView)

MA has faced significant resistance at its long-term resistance zone, as seen in its long-term chart above. That zone also coincides with the overvalued levels discussed in our valuation analysis.

Investors should note that MA is re-testing its near-term support, in line with its 50-month moving average (blue line). Therefore, we deduce that MA is at a critical juncture as it attempts to maintain its long-term uptrend.

However, investors need not get unduly concerned, as MA could still stage a bullish reversal over the next couple of months if the price action proves to be a bear trap (indicating the market denied further selling downside decisively).

As such, we believe it's appropriate to wait for more constructive price action as MA is still not undervalued as we move closer to a recession.

We reiterate our Hold rating on MA.

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This article was written by

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Sifting through the ultimate growth stocks for your portfolio

I'm JR, the lead writer and founder of JR Research and Ultimate Growth Investing Marketplace service. Our team is committed to bringing more clarity to investors in their investment decisions.

Our marketplace service focuses on a price-action-based approach to growth and technology stocks, supported by fundamental analysis. In addition, our general SA site discusses stocks from various sectors and industries. 

Our discussion mainly focuses on a short- to medium-term thesis. While we hold stocks for the long-term, we also use appropriate opportunities to benefit from short- to medium-term swings, leveraging long (directionally bullish) or short (directionally bearish) set-ups. 

My LinkedIn: www.linkedin.com/in/seekjo







Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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