Mastercard: Stablecoin Loser (Double Downgrade)

Summary I am double downgrading Mastercard to a strong sell due to unprecedented threats from stablecoins and merchant-issued digital currencies, undermining its core revenue model. Regulatory changes and retailer stablecoin adoption, especially by Amazon and Walmart, threaten Mastercard’s fee-based moat and could erode its pricing power. Mastercard’s valuation is dangerously high versus peers, with growth expectations that ignore looming disruption and the risk of a sharp de-rating. Despite MA’s global scale and brand, I see the risk/reward as skewed to the downside and believe stablecoin disruption will be an Achilles’ heel. Co-Authored by Noah Cox and Brock Heilig Investment Thesis Shares of Mastercard ( MA ) are down over 8% over the last month. I believe most of this drop-off is due to unprecedented disruption from emerging stablecoin payment networks and merchant-issued digital currencies that threaten the core card rails. Because of this, I am double downgrading shares of the payment card services corporation from a hold to a strong sell. I think retail giants like Amazon and Walmart launching their own stablecoins to bypass traditional card networks and sidestep interchange fees directly undermine Mastercard’s fee-based revenue model. I am also expecting regulatory and fee pressure – like the U.S. Credit Card Competition Act allowing banks to route payments over alternative networks and EU caps on interchange fees ( 0.2% debit, 0.3% credit ) to only get worse and erode Mastercard’s moat. Beyond stablecoins, it also appears that there will be other lower-cost alternatives outside of Mastercard’s network. Competitive technology shifts with fintech wallets (PayPal), real-time bank transfers, BNPL solutions, and blockchain-based payment rails offer merchants and consumers lower-cost alternatives. This clearly does not bode well for Mastercard. Cost-conscious merchants facing margin pressures have stronger incentives to adopt stablecoins or direct bank payments, which could end up diminishing Mastercard’s pricing power when they implement it at scale. If you think about Walmart and Amazon, these are both low-margin retailers (outside of AWS). Low-margin retailers will do anything to improve their margins. This includes cutting out the payment processor (Mastercard). With this, I view the Mastercard risk/reward as skewed toward the downside, warranting a strong sell for the credit card giant. Why I’m Doing Follow-Up Coverage It’s been over a year since I last published coverage on Mastercard , but I’ve recently been pushed by major developments – particularly the Senate’s recent passage of the GENIUS Act stablecoin bill . I believe this bill will fundamentally change the payments landscape. I think it’s a different world (compared to when I last wrote on Mastercard back in April 2024). Signals from retail behemoths (such as from the Wall Street Journal, which reports Amazon and Walmart are exploring stablecoins) indicate a more immediate competitive threat to Mastercard’s model than I had previously expected. There’s been about a 5% slide in Mastercard’s shares around the stablecoin news. Investors are repricing the risk and the need to reassess what, I think, is a weakening bull thesis. The purpose of my follow-up coverage is to look at the latest legislative progress, the real merchant stablecoin pilots, and fintech partnerships. I think there is an updated viewpoint investors need to look at. Investors need to look at this company from a more bearish stance. My last piece of coverage on Mastercard in 2024 was simply a Q1 preview that outlined what to expect from the company when it reported its Q1 2024 earnings. Stablecoin Loser As I mentioned above, the biggest reason for my follow-up coverage and the main idea behind my double downgrade of Mastercard is because of stablecoins. I view stablecoins – which are fiat-pegged digital tokens – as a direct threat to Mastercard’s payment rails. Merchant-issued coins facilitate transactions that bypass traditional card networks and eliminate most interchange fees. In my opinion, the GENIUS Act’s regulatory framework for private stablecoins will empower Amazon, Walmart, and others to launch their own tokens, enabling closed-loop ecosystems and self-contained payments flows. This is a huge threat to Mastercard. The big issue here for Mastercard is that the stablecoin payments are expected to save merchants anywhere from 2–3% per transaction by settling on blockchains rather than through card processors, undercutting Mastercard’s core revenue. This presents the company with a major problem. This is literally the foundation of their revenue stream. With this, I think it’s completely possible that universal card acceptance gets challenged here in the next few years. Closed-loop merchant stablecoins (e.g., AmazonCoin, WalmartCoin) integrated into apps and loyalty programs could scale as payment alternatives across retail and B2B. If multiple merchants (outside Amazon or Walmart) accept Walmart coin or Amazon coin because it offers near-instant settlements or low fees, what role does Mastercard play? On this same front, fintech and banking platforms like Circle/USDC, PayPal/PYUSD and a whole host of bank consortia are building stablecoin networks for instant, low-cost settlements, which threatens cross-border fees that really underpin Mastercard’s business. Mastercard’s business works well in the high regulatory barriers and low change markets. This is not the market we are entering. I believe that widespread stablecoin adoption, which appears to be imminent, will erode interchange and network fees. This will then force Mastercard to compete on lower-margin services or risk losing transaction volume. Both of these outcomes, in my opinion, will be detrimental to Mastercard and its business model. It’s why I am now a strong sell. As early evidence, the 5% stock drop after the GENIUS Act passed in the Senate and regulatory momentum underscores why I view Mastercard as a loser in this stablecoin-enabled world. If things continue to progress, I really see this as an Achilles heel to their whole revenue line. Valuation When we look at Mastercard’s valuation metrics , I think it’s clear that the stablecoin risk is not priced in. Seeking Alpha Quant gives the company an overall grade of an F. We can see that the company earns a grade of an F on more than half of the valuation metrics. Among the metrics that aren’t given a grade of an F, the only other grades given to Mastercard are D- and D. Mastercard’s highest-rated metric is the forward Non-GAAP PEG, which has a grade of a D. Looking at Mastercard’s forward non-GAAP price-to-earnings ratio, the company has a P/E ratio of 33.48. Compared to the sector median of 10.45, this is a heavy premium of 220.29%. As with many other ratings, Seeking Alpha Quant gives Mastercard a grade of an F on this metric. What’s most concerning to me about this is that competitors like Visa (~ 30x ), PayPal (~ 14x ), and Block (~ 23x ) have notably lower forward Non-GAAP price-to-earnings ratios. Their high ratio of 33.48 for Mastercard tells me the market has high growth expectations, but as I’ve mentioned in multiple spots in this article, I don’t see those growth expectations coming to fruition. I really believe that stablecoins are a risk. Mastercard’s forward Non-GAAP PEG ratio of 2.42 is nearly double the sector median of 1.26. As I mentioned earlier in this section, Seeking Alpha Quant gives Mastercard a grade of a D on this metric, which is the company’s best-graded metric. The fact that Mastercard’s PEG ratio significantly exceeds those of its peers suggests that there is overvaluation relative to its mid-teens EPS growth consensus. Looking at Mastercard’s forward EV/Sales ratio, the company has a ratio of 15.50, which far exceeds the sector median of 3.04. This is more than a 400% premium to the sector median, and Seeking Alpha Quant gives Mastercard a grade of an F on this metric. Mastercard’s forward Price/Cash Flow ratio of 30.92 is also ~114% higher than the sector median of 14.45. Seeking Alpha Quant gives Mastercard a grade of a D- on this metric. It really concerns me that Mastercard’s valuation multiples dwarf the sector median on these metrics, while fintech peers trade at a fraction of those multiples. Given moderating growth rates and emerging stablecoin threats, I think that the current valuation leaves little room for error and exposes the stock to a sharp de-rating toward peer multiples. If we see this happen, it could result in Mastercard’s forward price-to-earnings ratio dropping to ~20, which would be about 40% downside for the company. Bull Thesis While I’ve double downgraded shares of Mastercard from a hold to a strong sell, I will say the company still has a bull thesis that could come to fruition. At the core of it, Mastercard has an unparalleled global scale, with 150 million merchants and billions of cards outstanding. In essence, Mastercard has entrenched brand trust that the new entrants into the field cannot replicate overnight, even if they are a stablecoin that promises to cut down on merchant fees. I will admit that I do recognize the inherent security, fraud protection, and dispute-resolution guarantees of Mastercard’s credit card network that stablecoins wallets currently lack. Mastercard is also not naive and is actively integrating stablecoins, as they’ve recently partnered with Circle and Paxos to enable USDC settlements, potentially earning new network-based fees on crypto flows. Even with all of this, however, I don’t think this is enough. Stablecoin architectures are radically different from Mastercard’s traditional payment networks. If we look at Mastercard’s valuation, I don’t think it makes sense given that most of their business is at risk. The market is pricing Mastercard’s forward P/E higher than the sector median even though they are going to see a higher-than-average probability of substantial business disruption over the next 5 years. This seems mismatched and incorrect. Takeaway I believe it’s clear that Mastercard (unfortunately for them) sits at the nexus of stablecoin disruption, regulatory crackdowns, and lofty valuation expectations. When we take all of these things into consideration, I think it becomes clear that the risk/reward ratio is heavily tilted toward the downside. With this, I am now a strong sell. Given the structural threats to Mastercard’s fee model and the stock’s premium multiples, I find it hard to believe that the company will be able to overcome these hurdles. Stablecoins are simply a radically different space. Merchants will push customers to adopt them. Mastercard could very likely lose. With this, shares are double downgraded from a hold to a strong sell.

Source: Seeking Alpha