Payment processor Mastercard's stock is up about 4.5% in 2022.
Robust Q4 results contributed to positive sentiment in MA equities
However, profits could soon be taken in Mastercard stocks, pushing them towards $360. Such a potential drop would improve the margin of safety.
Stocks of heavyweight financial services Mastercard (NYSE:) are up more than 4.5% since the start of the year. The price increase was good news for shareholders, even as broader indices suffered losses over the past six weeks. For example, the 5.7% year-to-date decline and the Jones U.S. Financials Index is flat.
On April 28, 2021, MA shares rose above $400 and hit an all-time high. But since then, the stock has been under pressure. The stock's 52-week range was $306.00 – $401.50, while Mastercard's market cap is $366.83 billion.
Readers would like to know that shares of Visa (NYSE:), Mastercard's biggest rival, are also up 4.8% so far in 2022.
At this point we should also emphasize:
“A credit card network, such as Visa or Mastercard, sets the terms, authorizes and processes credit card transactions. Meanwhile, a credit card issuer—usually a bank, credit union, or similar financial institution—issues credit cards to consumers.”
In terms of market share, Visa has "nearly 50% of all credit cards in circulation in the US." Mastercard's market share is about 25%.
Meanwhile, another competitor, American Express (NYSE:) shares have gained 16.1% so far this year, reaching an all-time high on February 8. Other fintech names, such as PayPal (NASDAQ:) and Block (NYSE:) lost 35.5% and 36.7% YTD, respectively. Both names even reached a 52-week low on February 8.
How Recent Statistics Came in
Mastercard announced robust fourth quarter financials on January 27. Revenue was $5.2 billion, up 27% year over year. With consumer and cross-border spending soaring, the company saw a 27% increase in purchase volume. Adjusted earnings per share came in at $2.35 versus $1.65 a year ago.
Also in the fourth quarter, the financial services provider bought back 3.7 million shares. It also paid $434 million in dividends.
On the , CEO Michael Miebach said:
“We had a strong fourth quarter as spending trends continued to improve, with cross-border spending in the fourth quarter now above pre-pandemic levels. We are optimistic about the year ahead.”
Prior to release of quarterly results, Mastercard stock was about $350. Wall Street is pleased with the company's earnings results and robust balance sheet. On Feb. 8, Mastercard stock changed hands for $375, and its current price supports a 0.52% dividend yield.
Next step in Mastercard shares? .com, MA stocks have an "outperform" rating, with a 12-month average price target of $420.31. Such a move would represent an increase of approximately 12% from current levels. The target range is between $105 and $480.
Analyst consensus estimates polled by Investing.com.
Source: Investing.com
According to a number of valuation models, such as those that consider P/E or P/S multiples, dividends, or terminal values, the average fair value for Mastercard stock through InvestingPro is $373.39, or a decrease of about 1%.
Fair Value for Mastercard Shares.
Source: InvestingPro
Given the recent rise in price, some investors may want to consider calling the box office of MA stocks. Therefore, we could witness volatility in the coming weeks.
We expect Mastercard stocks to potentially fall towards $360, or even less, in the near term. After such a potential drop, MA shares are likely to trade sideways for several weeks until they establish a base, possibly between $355-$365, then begin another leg.
Therefore, Mastercard bulls with a two- to three-year horizon who are not concerned about short-term sloppiness might consider buying the stocks around these levels for long-term portfolios. Others, who have experience with options strategies and believe MA stocks could fall even further, may prefer to try a bear put spread.
However, option strategies are not suitable for all retail investors. Therefore, the following discussion is provided for educational purposes and not as an actual strategy to be followed by the average retail investor. from writing: $374.80
In a bear put spread, a trader has a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. Mastercard) and the same expiration date.
The trader wants MA shares to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.
Let's's have a look at this example:
For the first leg of this strategy, the trader can buy an at-the-money (ATM) or slightly out-of-the-money (OTM) put option, such as the MA April 14 370 strike put option. This option is currently offered for $17.80. It would cost the trader $1,780 to own this put option which expires in just over two months.
For the second part of this strategy, the trader is selling an MA put, such as the April 14 360 strike put option. The current premium of this option is $13.75. The options seller would receive $1,375 excluding trading commissions.
Maximum risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here, the net cost of the spread is $4.05 ($17.80 – $13.75 = $4.05).
Since each option contract represents 100 shares of the underlying stock, we need to multiply $4.05 by 100, which gives us $405 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, that is, if the Mastercard stock price on expiration is higher than the strike price of the long put (or $370 in our example).
Maximum profit potential
In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So in our example, the difference between the strike prices is $10 ($370 – $360 = $10). And as we saw above, the net cost of the spread is $4.05.
The max profit is therefore $5.95 ($10.00 – $4.05 = $5.95) per share, minus commissions. When we multiply $5.95 by 100 stocks, the maximum profit for this option strategy is $595.
The trader will realize this maximum profit if the MA share price is equal to or lower than the strike price of the short put (lower strike price) at expiration (or $360 in our example).
Short put positions are typically assigned at expiration if the stock price is below the strike price (i.e. $360 in this example).
However, there is also the possibility of early allocation. Therefore, the position should be monitored until maturity. At that price, commerce will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $370 in our example) minus the net premium paid (i.e. $4.05 here) would give us the breakeven price.
In this example: $370 ? $4.05 = $365.95 (minus commissions).
Bottom Line:
We view MA stocks as a solid long-term choice for most portfolios. However, there could be profit taking in equities in the short term. Therefore, a trading strategy like the one described above may be appropriate for traders with a bearish view of Mastercard stocks.
