We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where Mastercard Incorporated (NYSE:MA) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A woman using a payment terminal at the checkout of a store showing payment products and solutions.
Mastercard Incorporated (NYSE:MA)
Analysts’ Upside Potential: 9.52%
Mastercard Incorporated (NYSE:MA) is a prominent multinational payments technology company that facilitates communication between financial institutions, retailers, governments, and consumers across over 210 countries and territories.
In a world where checks and cash are still used for 85% of retail transactions, the company keeps growing. Along with payment gateway services, Mastercard offers a variety of payment options, such as debit, credit, and prepaid cards.
Mastercard posted strong financial results in the second quarter of 2024, with a 17% YoY increase in profit to $3.3 billion. Earnings per share excluding one-time costs were $3.59, above market projections of $3.51. In addition to exceeding market forecasts, revenue increased by 13% YoY to $6.96 billion. Growth in major international markets like Europe and Latin America, along with a solid U.S. customer base, contributed to the impressive results.
In July 2024, Mastercard’s cross-border volume climbed by 17% year over year, pointing to a strong increase in travel demand. This growth helps the company maintain its strong global footprint. Maintaining a competitive advantage over competitors like Visa has been made possible by the company’s international growth strategy, especially in Europe and Latin America.
Even though Mastercard Incorporated (NYSE:MA) performed well, consumer spending may be slowing down. Switched volume growth slowed in Q2 2024 to 10% from 12% in Q1 to 2024.
Given its reliance on consumer health, the company is susceptible to downturns in the economy, particularly if spending is curtailed as a result of the Fed’s rate hikes. Furthermore, pressure on low-income clients may affect transaction volumes, which could jeopardize long-term expansion.
Logan Purk, technology analyst for Edward Jones, stated, “Mastercard’s results, while not perfect, should give reassurance that the spending environment remains solid,”
L1 Capital International Fund stated the following regarding Mastercard Incorporated (NYSE:MA) in its Q2 2024 investor letter:
“The share prices of Mastercard Incorporated (NYSE:MA) and Visa, both long term Fund investments, have both drifted down over recent months. There have been no dramatic developments, but there has been a general slight softening in the rate of growth of consumer spending in the U.S. and globally, a court decision rejecting Mastercard and Visa’s proposed settlement of a long-lasting dispute with U.S. merchants as well as other modest adverse regulatory developments. We continue to view Mastercard and Visa as two of the highest quality businesses in the world, and both are well placed to continue to deliver attractive, risk adjusted returns to shareholders over time.”
Given its strong international growth and strong financial performance, there are 26 analysts who have collectively rated the stock as a “buy.” The average price objective indicates a possible gain of 14.11% from the current stock price of $108.18.
Overall MA ranks 6th on our list of the best financial services stocks to buy. While we acknowledge the potential of MA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.