Effects of Coronavirus Easing on Mastercard

While there were some differences, Mastercard’s MA second-quarter results largely echoed what we saw from Visa earlier in the week. The coronavirus pandemic has led to major declines for the payment networks, and in one respect, they are particularly exposed relative to other payment names. However, the impact should be transitory, and in the long run the pandemic will likely accelerate the ongoing shift toward digital payments. We see nothing to shake our belief that Mastercard and Visa’s competitive position is essentially unassailable or alter our favorable long-term view. We will maintain our $272 fair value estimate and wide moat rating.

Net revenue was down 19% year over year, largely reflecting a 10% constant currency drop in payment volumes. However, the company provided monthly disclosures that show that transaction volumes have steadily improved since April and in July returned to modest growth. This suggests the worst is behind the company, and secular tailwinds have started to reassert themselves.

However, cross-border volumes are particularly important for Mastercard, given the higher fees it can realize on these transactions, and here the picture is less bright. Cross-border volumes (excluding intra-Europe transactions, which are priced similarly to domestic transactions) fell about 50% in the wake of the pandemic, and there has been no material improvement through July. Additionally, Mastercard appears to be suffering a bit worse than Visa in this respect. We expect this to be an ongoing issue, as cross-border volumes are highly tied to travel, and we believe a major bounce back in travel could hinge on the development and widespread availability of a vaccine.

Operating margins declined to 51.2% from 58.3% last year on a net revenue basis, due to the fixed cost nature of the business. However, Mastercard’s ample margins provide plenty of room to weather this situation, and we would expect margins to fully recover once growth normalizes.

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