Mastercard Results Show Bite From Growth

While wide-moat Mastercard MA saw only about a one-month effect from the COVID-19 crisis in the first quarter, the results show the significant impact the current situation will have on the company’s near-term growth. However, in our view, nothing in the quarter impacts the favorable long-term outlook for the company. We expect to make some changes to our near-term assumptions, but we will maintain our $272 fair value estimate.

Net revenue grew 5% year-over-year excluding currency impacts. This reflects the blend of more normalized growth and the declines the company has seen more recently due to the impact of COVID-19. Management provided some disclosures which show that transactions have been declining at about a 20%-25% year-over-year rate through April and the situation has yet to materially improve. As such, we expect the company will see a material decline in revenue until the situation starts to normalize.

Compared with other payment processors, Mastercard is more exposed to this situation due to its reliance on cross-border transactions, for which it charges significantly higher fees. Cross-border revenue accounted for 22% of gross revenue last year. In recent weeks, the company has seen a roughly 50% year-over-year decline in cross-border volume, as much of cross-border activity is travel-related, although the component that is related to online commerce has provided some ballast. We think a full bounceback in travel could be more delayed than in other areas.

On a net revenue basis, operating margins declined to 55.3% from 56.9% last year. While we expect management to take some actions to rein in cost increases, we think the fixed nature of payment processing will result in margin pressure while volume declines persist.

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