Mastercard (MA) stock has significant upside potential from here given its strong free cash flow. That also makes it a good income play for short sellers of its out-of-the-money put options.

I discussed this in my last Barchart article on Dec. 25, 2023, “Mastercard Has 30% Upside From Here Based on Its Massive Free Cash Flow.” At the time, MA stock was at $424.10 and today it is trading for $428.12 per share.

Moreover, I recommended shorting put options expiring on Jan. 12 at the $410 strike price. The stock closed at $429.10 on Jan. 12, so the short-put investor had a great outcome. The premium received was $1.83 for a 0.446% immediate yield with just 3 weeks until expiration.

We can now repeat that trade for extra income. But first, let's review why Mastercard looks so attractive, based on its target prices.

Free Cash Flow Can Push MA Stock Higher

Analysts forecast revenue of $28.09 billion this year at Mastercard, up over 12% from a forecast of $25.03 billion for 2023. The company produced a massive 45.9% free cash flow (FCF) margin last quarter, as I described in my last article. So, if this keeps up, its full-year 2024 FCF could hit $12.89 billion in FCF (i.e., $28.09 billion x 45.9%).

That is useful since we can use it to forecast a target price. For example, using a 2.5% FCF yield, MA stock could end up with a market cap of $429.7 billion. That represents a potential upside of 6.78% over its market cap today of $402.4 billion (i.e., $12.89b/0.03).

Moreover, using a 2.5% FCF yield (i.e., $12.89b/0.025), its market cap could rise to $515.6 billion. This is the same as multiplying its FCF of $12.89 billion by 40x. That implies that MA stock could rise 28.3% higher.

That gives us a price target of $549 per share. Other analysts also see higher prices for MA stock.

Analysts Forecast Higher Prices

For example, the average price target of 25 analysts surveyed by AnaChart.com, a new sell-side analyst tracking service, is $483.46 per share. 

That represents a potential upside of 12.67% from yesterday's closing price of $429.10 per share.

Morningstar believes that Mastercard has a well-entrenched competitive position. This accounts for why the stock is so highly valued by the market. That could also account for why its FCF is worth 40x on a forward basis.

Shorting OTM Puts for Income

The issue is that shareholders are not getting paid to wait for this. MA stock has a meager 0.62% dividend yield. 

One way around this is to sell short OTM puts options.For example, look at the Feb 2, 2024, put options at the $410 strike price level. A short seller of those puts can receive $2.23 today. That works out to an immediate yield of 0.5439% (i.e., $2.23/$410.00).

In other words, for an expiration period of just 17 days, the short put seller can make almost the same yield equal to the annual dividend yield.

Moreover, if the investor were to repeat this trade every 3 weeks for a year the expected return (ER) is 9.24%. That is seen by multiplying today's put option yield of 0.5439% by 17 since there are 17 periods of 3 weeks in a year.

This won't work every period it is tried. However, the high 9% ER shows that shareholders can make extra income while waiting for the stock to reach its target price.

More Stock Market News from Barchart

• Kura Oncology (KURA) Offers Speculators a Profit-Scalping Opportunity
• 5 Growth Stocks with 66% Upside Potential or More
• Will Additional Stimulus Revive Economic Growth in China?
• Stocks Pressured by Higher Bond Yields and Mixed Earnings Results

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.