Over the past three years, Mastercard's (NYSE: MA) stock has rallied by more than 40% as the S&P 500 advanced by about 25%. The payment processing giant impressed investors with its robust growth, wide moat, and resistance to economic headwinds.
But will it keep rising over the next three years?
How does Mastercard make money?
Mastercard and Visa are the two largest card payment processing companies in the world, but neither of them issues any cards. Instead, they both partner with financial institutions to issue co-branded cards, and those partners actually handle the accounts and shoulder all the risk involved with lending money to cardholders.
Image source: Getty Images.
Mastercard and Visa generate most of their revenue by charging "swipe fees" that average a bit over 2% for processing each transaction from those co-branded cards. That simple business model is evergreen -- it usually flourishes throughout economic booms and keeps the processors well insulated from credit risks during economic busts. By comparison, American Express is both a card-issuing lender and a payment processor. That's why it's generally more selective about its credit card approvals, and why it controls a smaller slice (9%) of the global card processing market than Mastercard (21%) or Visa (32%).
What happened to Mastercard over the past few years?
Mastercard gauges its growth based on its gross dollar volume, cross-border volume, and switched transactions (which include its authorization, clearing, and settlement services). In 2020, its growth stalled out as the early months of the COVID-19 pandemic broadly curbed consumer spending. But over the following three years, it grew rapidly again -- even as consumers and businesses grappled with inflation and rising interest rates.
Metric | 2020 | 2021 | 2022 | 2023 | 9M 2024 |
|---|---|---|---|---|---|
Gross dollar volume growth | 0% | 21% | 12% | 12% | 10% |
Cross-border volume growth | (29%) | 32% | 45% | 24% | 17% |
Switched transactions growth | 3% | 25% | 12% | 14% | 11% |
Adjusted revenue growth | (8%) | 22% | 23% | 13% | 12% |
Adjusted EPS growth | (16%) | 30% | 34% | 15% | 20% |
Data source: Mastercard. Figures are on a currency-neutral basis. YOY = Year over year.
Mastercard's growth cooled off slightly in the first nine months of 2024. But during its third-quarter conference call in October, CEO Michael Miebach said he remained "positive" about its growth outlook, and that the stabilizing macro environment "continues to underpin the strength in consumer spending."
Mieback expects Mastercard's revenue to grow in the "low-teens range on a currency-neutral basis excluding acquisitions" in the fourth quarter. For the full year, analysts expect its revenue and adjusted earnings to rise by 12% and 18%, respectively.
What will happen to Mastercard over the next three years?
The near-term outlook seems stable, but Mastercard provided a softer long-term forecast during its investor day presentation on Nov. 13. It now expects its revenue to grow annually by a percentage at the high end of the low double-digits from 2025 to 2027.
During a previous investor day presentation in 2021, Mastercard had predicted its revenue would grow by percentages in the high teens from 2022 through 2024. But it came up short of that target in 2023, and analysts expect it to miss it again this year.
From 2024 to 2026, analysts expect Mastercard's revenue to grow at a compound annual rate of 12% as its EPS increases at a compound annual rate of 17%. Those estimates roughly match management's latest expectations, but some investors might have been hoping for stronger growth based on the expectation that interest rates will gradually decline.
A lot of optimism is already baked into Mastercard's stock price. It currently trades at about 32 times expected forward earnings, and that premium valuation could limit its capacity for near-term gains. Visa, which is growing at a slightly slower rate, trades at 28 times forward earnings.
It could face challenges as it expands its ecosystem
For now, Mastercard will focus on driving more consumers toward digital payments, providing more cross-border remittance services, and rolling out more generative AI, security, and anti-fraud features for its higher-growth services division. It recently agreed to acquire to the threat intelligence company Recorded Future and the subscription management start-up Minna Technologies to accelerate those efforts.
But as Mastercard expands its business, it could face more pressure from merchant groups and government regulators to reduce its swipe fees. Back in March, Mastercard and Visa seemingly reached a settlement with several merchant groups in the U.S. to gradually reduce their swipe fees. But in June, a U.S. judge unexpectedly rejected that settlement -- which implies Mastercard and Visa might need to reduce their swipe fees even more to avoid facing action by antitrust regulators.
Both companies also face competition from newer "buy now, pay later" (BNPL) platforms such as Affirm. Those potential challenges and its recent acquisitions could squeeze its gross margins, even if the broader economy keeps growing and the Fed continues to cut interest rates.
So where will Mastercard's stock be in three years?
Assuming Mastercard matches analysts' expectations and grows its EPS at a compound annual rate of 15% from 2026 to 2028, and that it still trades at 32 times forward earnings at the end of that period, its stock would rise by more than 54% to about $806 over the next three years. At a more modest forward multiple of 25, it would climb 21% to $630. Simply put, Mastercard's stock could keep rising through 2027, but investors should be aware that it's already carrying a frothy valuation, and that it could face unpredictable regulatory challenges.
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American Express is an advertising partner of Motley Fool Money. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
