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Pandemic Continues to Weigh on Mastercard

We plan on maintaining our fair value estimate and wide moat rating.

While Mastercard MA saw improvement in parts of its business in the third quarter, the pandemic is still weighing on overall results, and the company continues to endure meaningful declines in revenue and margins. Still, nothing in the quarter was a major surprise, and we will maintain our $272 fair value estimate and wide moat rating.

Net revenue was down 14% year over year. Mastercard and the industry have seen a steady bounceback in transaction volumes since April lows, and gross dollar volume and switched transactions were up 1% and 5% year over year, respectively, in the quarter. The October figures the company released suggest further improvement, although it is modest. For domestic transactions, the long-term secular trend toward electronic payments appears to be reasserting itself, and the worst seems to be past unless the pandemic takes a sharp negative turn, although macroeconomic conditions could weigh on growth.

However, Mastercard remains disproportionally reliant on cross-border volumes, given the much higher fees it collects for these transactions, and here the picture is less rosy. The dramatic fall-off in travel has only partially been offset by an increase in e-commerce activity, and there is little sign of an improving trend, with cross-border volume down 36% year over year in the quarter. Overall cross-border volume declines have moderated a bit, but that largely reflects recovery in intra-Europe transactions, which are priced similarly to domestic transactions. October figures don’t show any meaningful improvement, outside of intra-Europe transactions. We think recovery for cross-border volumes will likely be delayed until the development and distribution of an effective vaccine, and this will likely be the most enduring pandemic headwind.

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