Few investors realize how much international travel can affect Mastercard (MA 0.39%). When governments worldwide imposed COVID-19 travel restrictions in 2020, Mastercard's revenue and profits suffered. A still-sluggish global travel recovery in 2021 helped to explain why Mastercard's stock severely underperformed the S&P 500. However, experts expect international travel to accelerate in 2022. Here's why Mastercard's stock still has plenty of upside left to look forward to as the travel recovery picks up steam.

One person handing another person a credit card

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Why international travel benefits Mastercard's business

Mastercard mainly generates revenues on domestic transactions by charging each financial institution issuing Mastercard-branded cards a fee, based on a percentage of how many dollars customers spend through its cards.

In addition, Mastercard will attach the following costs for transactions on cards used outside the traveler's home country:

  1. A foreign transaction fee, paid by card users.
  2. A cross-border fee, charged to merchants.
  3. An additional fee for any currency exchange transaction.

Mastercard generates its highest-margin revenues through the above additional fees for foreign travelers' card use. And Mastercard's 2020 results show what happens when adverse circumstances reduce foreign travel. Once 2020 international passenger totals dropped by more than 60% from 2019, Mastercard's 2020 growth in cross-border volume -- when someone from one country spends money in another country -- dropped 29% from 2019. . Additionally, the drop in cross-border volume showed up in Mastercard's 2020 revenues, which fell 9% from 2019, and in 2020 adjusted EPS, which was down 16% from 2019.

International travel is expected to rebound strongly

International travel began to recover in fits and starts in 2021, but it's still 49% below 2019 levels. However, even that modest increase in international travel had favorable results on Mastercard's 2021 cross-border volume growth, which increased 32% in 2021. Additionally, 2021 revenues rose 23% from 2019, and adjusted EPS was up 30% from 2020 -- all before countries began substantially lifting international travel restrictions.

International travel restrictions began to ease near the end of 2021 in the US, with multiple countries opening up in February and March 2022 -- resulting in more people traveling and better business results for Mastercard. For example, Mastercard's first-quarter 2022 earnings report showed quarterly cross-border volume rising to 53% year-over-year. In addition, Mastercard's trailing 12-month (TTM) compound annual growth rate (CAGR) revenues grew 23%, and EPS TTM CAGR grew 46%.

During a recent interview, Expedia Group (EXPE -2.01%) Chief Executive Officer Peter Kern expressed confidence that travel during the summer of 2022 could be significant, and other experts like the World Travel & Tourism Council agree. Additionally, the International Air Transport Association expects passenger numbers to exceed 2019 levels in 2024 -- which should accelerate revenue and profitability for Mastercard.

What's next for Mastercard

However, despite the optimism of a travel rebound among most travel industry experts, investors should be cautious of the risk of recession in Europe caused by the fallout from Russia's invasion of Ukraine. One top-ranked economist thinks that the European economy is already contracting. Moreover, since Europe is a large part of Mastercard's business, the company's results could deteriorate over the short term if a European slowdown occurs -- a risk you must accept if investing in Mastercard. Other potential headwinds that can stall a travel rebound are inflation stifling consumers' ability to spend money, and new Covid-19 variants causing governments to renew travel restrictions.

The good news is that the World Health Organization recently stated that global Covid-19 deaths are at their lowest levels since March 2020 -- lowering the risk of widespread travel restrictions. As for inflation, Mastercard's first-quarter 2022 earnings report indicated that U.S. consumer spending remains healthy so far. One additional positive factor is that China, Taiwan, and Japan still have relatively strict travel restrictions, hampering the recovery in Asia. However, once those countries eventually lift travel restrictions, Asian travel should rapidly grow, boosting Mastercard's results.

Mastercard trades at 37 times trailing 12-month earnings as of this writing which is in the middle of its range over the past 10 years. In comparison, Visa (V -0.05%) trades at 32 times trailing 12-month earnings; Mastercard's revenues and net income have grown faster than Visa's over the past three years, so investors have rewarded it with a higher valuation. Both Mastercard and Visa are a credit card duopoly, maintaining international dominance in the payments market through a strong network effect -- more cardholders means more merchants will accept the payment cards, and vice versa. Investors value Mastercard so highly because it can maintain high margins in a market with only one significant international competitor. For consumer finance stock investors able to withstand short-term turbulence in the stock market, Mastercard should be a quality investment to take advantage of the impending upswing in travel over the next three to five years.