After 2020 Earnings Fall 21% – Is Mastercard A Buy?
Back in October I showed you 2 Reasons To Avoid Mastercard stock to Depression Proof Your Portfolio.
Today I give an update after it released its latest earnings and answer – After 2020 Earnings Fall 21% – is Mastercard A Buy?
You can read the original article in full at the link above.
But if you don’t want to; here’s a quick recap of why I said you should buy avoid Mastercard to Depression Proof Your Portfolio.
2 Reasons To Avoid Mastercard
- It’s Overvalued
As of this writing Mastercard (MA) is a $343 billion market cap 2nd largest payment processor in the world behind only Visa.
And its massively overvalued…
- Its P/E is 46.8.
- Its P/CF is 39.6.
- And its forward P/E is 38.
On all these metrics I look to buy investments below 20 to consider buying them.
Mastercard is well above these numbers which means its overvalued by a large amount.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
This lack of a margin of safety is the category Mastercard falls into right now.
But why is it so overvalued?
Because during this pandemic people are buying less stuff and paying their bills less. Which leads to lower revenues, profits, and cash flows for the company.
When profits and cash flow fall but the stock price doesn’t fall as much… It leads to far higher valuations. And this leads to increased risk, lower margin of safety, and lower returns you should expect to earn by owning its stock going forward.
Let’s get to reason #2…
2. The Coronavirus Will Harm Mastercard
Most of the time in this section I tell you why a business won’t be harmed by the coronavirus.
But Mastercard will.
Due to mass unemployment people may stop paying their mortgages.
They may stop paying their student loans.
They may stop paying their car payments.
And they may stop paying their credit card bills and buying as much stuff…
This negatively affects Mastercard which was illustrated when Mastercard released its most recent quarterly report on July 30th, 2020.
- Revenue fell 19% in the 2nd quarter of 2020 compared to the 2nd quarter 2019 to $3.34 billion.
- Operating income fell 28% in this period to $1.7 billion.
- And net income fell 29% in this period to $1.4 billion.
This in large part is due to a 9.4% decline in transaction volume in the quarter because people are buying less stuff and swiping their Mastercard’s less.
With tens of millions still out of work in the United States and hundreds of millions out of work worldwide – plus the pandemic still ongoing – Mastercard’s business will be harmed in the short to medium term.
Will it crush the company?
But combine this with its huge valuation and you should avoid Mastercard stock due to the increased risk.
To learn why you should also avoid its large competitor Visa click the following link – 3 Reasons To Buy Visa – And 2 Not To.
This thesis to avoid Mastercard due to its high valuation and negative effects of the coronavirus on its business continued to play out after it released its most up to date quarterly earnings on January 28th, 2021.
- 4th quarter revenue fell 7% in the year-to-year quarterly period to $4.1 billion.
- 4th quarter operating income fell 14% in the year-to-year quarterly period to $2.1 billion.
- 4th quarter net income fell 15% in the year-to-year quarterly period to $1.8 billion.
- Full year 2020 revenue fell 9% to $15.3 billion.
- Full year 2020 operating income fell 16% to $8.1 billion.
- And full year 2020 net income fell 21% to $6.4 billion.
In other words, Covid caused a 7% to 21% reduction in its business in the 4th quarter of 2020 and for the full year depending on which metric you look at.
None of this is good.
Especially with Covid still largely out of control in the US and Europe.
Weirdly, this didn’t cause a huge decline in its share price.
From October 2020 when I first told you to avoid Mastercard stock to today its shares are about flat near $339 per share.
And when profits fall dramatically while a share price does not, the stock gets even more overvalued.
It P/E is now 53.6.
Its P/CF is 47.2.
And its forward P/E is 41.7
What does this all really mean?
That Mastercard is in worse shape now when considering it a potential investment than it was back in October. This due to its falling revenues and profits combined with its shares being flat.
And this makes buying Mastercard stock even riskier now than it was back then.
For these reasons, I continue to recommend you avoid Mastercard stock.
To see how this compares to one of its large competitors Visa after its latest earnings – use the following link where I answer – Is Visa Cheap Enough To Buy After Releasing Its Latest Earnings?
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.