Mastercard Stock's Q2 Financial Results Outshine Competitors

Key Points

• Mastercard beat estimates on adjusted EPS and revenue, sending shares up 3% on the day.
• Results impressed compared to Visa, whose sales fell after its earnings release last week.
• The firm's $30 billion lawsuit settlement was rejected, sending the case to trial.

Mastercard NYSE: MA is the third largest company in the United States financial services industry, with a market capitalization of $431 billion. The firm released Q2 2024 financial results on July 31, 2024. We will review key points from the earnings release and explain the company's diverse revenue streams. We'll conclude by highlighting critical factors to monitor around the firm and share updates on Wall Street analysts' price targets.

Mastercard operates as one reportable segment, known as Payment Solutions. In 2023, 30% of the company’s revenue came from the United States, and no one customer contributed more than 10% of the revenue.

Mastercard Beats Adjusted EPS and Revenue Estimates, Impressing Over Visa

Mastercard beat adjusted earnings-per-share estimates, coming in at $3.59, for an earnings surprise of 2.3%. The figure increased by 24% from the previous year. Revenue also beat estimates by $110 million, coming in at $6.96 billion. This was an increase of 11% and represents a revenue surprise of 1.6%.

The company reiterated its full-year revenue guidance of low double-digit growth. Mastercard attributed its rising revenue to growth in its payment network and value-added services and solutions.

Payment network revenues were up 7%, driven by a 9% increase in gross dollar volume, a 17% increase in cross-border volume, and an 11% increase in switching transactions. Gross dollar volume is the dollar amount of transactions the company’s payment network facilitates.

Cross-border volume refers to the value of transactions made between parties in different countries. These transactions often generate higher fee revenue. When a sale is made, transactions are switched to transfer money from the purchaser's bank to the merchant's bank.

Value-added services and solutions include cybersecurity solutions that help detect, prevent, and respond to fraudulent activity or cyberattacks. The company also provides data and insights. They help firms understand market trends, increase value, and reach customers. Revenue in this division was up 18% from last year. On the day of the release, shares were up 3.6%.

This was a positive earnings report, especially when comparing results to Visa NYSE: V, which released earnings last week. Mastercard beat Visa’s 7% increase in gross dollar volume and its 14% increase in cross-border transactions. Visa’s shares fell 3% on the day of its release.

What to Watch For: Merchant Lawsuit, Consumer Spending Readings

One issue to watch around Mastercard is developments in the lawsuit the company is currently in. Merchants using their payment systems are currently suing Mastercard and Visa. The merchants accuse Visa and Mastercard of being a cartel. A cartel is when two powerful firms collude to fix prices. This helps attract business for themselves and shut out competitors.

Merchants believe that Visa and Mastercard use their cartel to charge excessive interchange fees when processing transactions. They argue this has unfairly hurt their businesses.

Visa and Mastercard arranged a settlement for the case in March 2024 with several avenues to relieve the merchants. First, the companies offered to pay the merchants a collective $30 billion. They also agreed to lower fees by at least 4 to 7 basis points for the next three to five years. The current fee range is approximately 1.5% to 3.5% of transactions.

In June, a judge rejected the settlement deal; the case will now go to trial. When it comes to class action lawsuits, companies typically end up paying less when they can settle out of court. Now that the case is going to trial, Mastercard’s eventual bill and changes in agreements with merchants could be much harsher. Investors should watch for news of a revised settlement that would help keep Mastercard’s liability more reasonable.

Updated Analyst Price Targets

Investors should also watch for the next consumer spending reading, which will be released on August 31st. This number is indirectly tied to the revenue that firms like Mastercard will bring in, as more spending means the company can charge more transaction fees.

Since the earnings release, five Wall Street analysts have updated their price targets on Mastercard. All of them increased their estimates. The average price target among those analysts is $532, implying an upside of 13%.