Mastercard – services boost first quarter revenue

Mastercard’s first quarter results came in broadly in line with analyst expectations.

Net revenue increased by 11% to $6.3bn when ignoring currency movements. Net revenue from the payment network was up 8%, lagging volume growth due to a 20% increase in rebates and incentives. Revenue from value added services grew by 15%.

Underlying operating profit was up 12% to $3.7bn.

Free cash flow fell from $1.6bn to $1.3bn reflecting the timing of certain receipts and payments. A further $2.0bn was spent on share buybacks and $0.6bn was paid out in dividends. Net debt came to a total of $8.3bn.

Mastercard reaffirmed its full-year guidance, expecting underlying net revenue growth to remain at the upper end of low double digits.

The shares ended the day down 2.0%.

Our view

Mastercard’s had a robust start to 2024, although markets seemed a touch disappointed not to see an upgrade to the full year outlook. Despite fierce competition in the rest of the payments world, the card networks remain dominated by two giants, Visa and Mastercard. They enable banks to issue credit and debit cards without either network having to take any credit risk.

And despite the emergence of competing payment methods, card usage continues to grow and the model has proved its resilience through multiple economic ups and downs. In fact, Mastercard has grown revenue in all but one year since 2006. Despite the proliferation of payment methods, many of the newer kids on the block such as Apple Pay and PayPal still rely on cards for a big chunk of their transactions.

Mastercard has a more even geographical mix than its arch-rival Visa, which is particularly dominant in the United States. Cash-to-card migration has all but run its course across the pond. But in some markets, like Europe, there’s still a tailwind to ride, which should blow in Mastercard’s favour.

Services are also an important and faster-growing part of the business and one where Mastercard appears to be stealing an edge over its rivals. Growth is being driven by demand for cyber security. Intelligence solutions are also playing their part and provide valuable insight from the huge data sets that come from processing payment volumes in the trillions of dollars every year.

These services have helped to prop up revenue growth so far in 2024, but the functionality they provide merchants and financial institutions should also help to win market share, and that looks to be playing out in multiple territories. In an effort to win over more customers, rebates and incentives are also on the rise.

Keeping ahead of the pack doesn’t come cheap though. Internal investment in the business is forecast to more than double to over $800mn per annum over the next three years. But robust margins and strong cashflows mean these are commitments Mastercard can afford. This also leaves room for dividends and share buy backs, although there can’t be any guarantee of future payments.

Mastercard’s revenue is forecast to outgrow Visa in the next few years, which we believe is down to some of the structural differences discussed above. This is reflected by its valuation sitting at the top end of its peer group on a price-to-earnings basis, which adds pressure to deliver. There’s still some work to be done to meet this year’s number so whilst we like the story, we do see some potential downside risk if growth targets aren’t met.