2 Reasons to Buy Mastercard and 1 Reason to Wait

It's been a while since Mastercard (MA 0.15%) has had everything going its way. Just as the payments-processing giant was putting the worst of the pandemic behind it last year, rising interest rates and inflation raised the specter of a recession.

Mastercard's business relies on consumer spending, so it's hard to look past these short-term worries. But there's reason for optimism, too. With pandemic-related travel restrictions mostly lifted, Mastercard can again take advantage of its global reach. And the key role it plays in the world's financial system still translates to strength on the bottom line.

Is now the time to capitalize on the market's short-term concerns? Here are two reasons to buy Mastercard today and one reason you might want to wait.

Buy: Mastercard's missing piece is back

Mastercard isn't an obvious travel industry stock, but it earns a healthy share of its revenue from cardholders spending money outside their home countries. Last year it earned 25% of its gross revenue from processing domestic sales volume, while it earned 18% from cross-border volume. 

During the 2020 shutdowns, Mastercard's cross-border assessments fell by 37% -- much worse than its 2% dip in domestic assessments, and a major reason it posted its first annual revenue decline as a public company that year. But as countries reopened to normal international travel, its cross-border assessments grew by 33% in 2021 and 42% in 2022, finally pushing them back above their 2019 level.

There's a little upside left, but keep your expectations in check. Management expects "elevated" cross-border growth in the current quarter after the omicron variant suppressed travel in the same period of 2022. At the same time, management said the effects of pent-up travel demand have mostly played out, and cross-border growth will soon be "healthy" rather than "accelerated."

Take all this less as a promise of further recovery and more as reassurance that Mastercard has all its usual growth drivers back in place.

Buy: Mastercard is still making itself more valuable

As one of the two gigantic global payments networks (along with Visa), Mastercard is a key piece of the world's financial system. But its strength isn't all about incumbency.

Although 65% of Mastercard's revenue last year came from its payment network, 35% came from value-added features such as cybersecurity, data-related services, and more. The company serves small fintechs as well as big banks -- earlier this month, in fact, it announced a partnership on cross-border spending with payments platform PVP Financial and payments infrastructure company Payall.

That one deal is unlikely to move the needle for it financially, but the point is that Mastercard sees potential partners everywhere. At a recent fintech conference, Chief Product Officer Craig Vosburg described Mastercard's approach to partners' needs this way: "They've got their own strategy. They have their own objectives. They have their own views on the role payments plays in delivering on their business objectives. And we have a strong partnership orientation in working with them to figure out the best combination of things to innovate together and help them differentiate from their competition."

A key sign of Mastercard's strength is its ability to increase profit and free cash flow at a higher rate than revenue, which shows its business can scale. Visa, which has a similar model, can make the same claim, but Mastercard, the smaller of the two, is generally growing faster.

Source: SEC filings. Five-year period ended Dec. 31, 2022. Trailing-12-month figures are used for Visa, whose fiscal year ends Sept. 30.

Wait: Mastercard is counting on consumer resilience

Management was cautiously optimistic on the Jan. 30 earnings call that consumer spending was "resilient." Chief Financial Officer Sachin Mehra reiterated that optimism at a conference at the end of February. Has anything changed since then?

Although the troubles of regional banks have pushed recession fears out of the headlines, the data trends that made investors wary over the winter haven't abated much. While the U.S. labor participation rate keeps ticking up from its pandemic lows, consumer confidence remains near 10-year lows. Inflation, while cooling a bit, is still at 6%. And the Federal Reserve just raised its benchmark interest rate for the ninth time in the past year.

The strength of the consumer in any one year is a short-term issue for a business with Mastercard's staying power, and management knows better than to set Wall Street up for disappointment. At the same time, it's hard to argue the stock offers much margin of safety if consumer spending slows. Although Mastercard's price-to-earnings ratio of about 34 is below its 10-year average, that's still a premium valuation. (Visa's is a little lower, at about 30.)

The buys have it

With Mastercard playing catch-up during the pandemic, it's no surprise that the stock is trailing the S&P 500 over the past three years. If you have misgivings about buying today, you can probably afford to wait.

But I'm a long-term shareholder because of Mastercard's immense -- and growing -- value to the world's financial system. And when the economy improves, it should have all its usual tools available to take advantage. I'm not selling.