Credit card companies like Mastercard (MA 0.07%) are poised to benefit from the world moving away from cash and toward digital payments over the next several years. With a proven track record of growth and innovation in the payment industry, it's no surprise that investors have loved its stock for years. But with significant legal and regulatory risks on the horizon, the question remains: Should you continue to hold on to your shares? Let's dive in and find out.
Solid second-quarter results
Mastercard's second-quarter 2023 earnings results were strong. The company reported diluted earnings per share (EPS) of $2.89, up 12.9% from last year's period and beating analysts' expectations. Net revenue jumped by 14.5% to $6.3 billion, beating estimates of $6.18 billion. Several factors drove the strong results, including:
- Resilient consumer spending: Mastercard's gross dollar volume (GDV) increased by 12% year over year, with solid growth in both the U.S. and international markets.
- Recovery in travel: Mastercard's travel-related GDV increased by 24% year over year, up 154% from pre-pandemic levels.
- New network types: Mastercard is making progress in gaining a foothold in new network types from within its open banking and digital identity initiatives.
Mastercard CEO Michael Miebach said, "We delivered another strong quarter of revenue and earnings growth, supported by resilient consumer spending, particularly in travel and experiences." He added, "Our differentiated capabilities, diversified business model, and focused strategy positions us well to capitalize on the significant opportunity ahead."
Mastercard's second-quarter 2023 earnings results showed that the company is well positioned for continued growth in the future.
A few stumbling blocks
Despite delivering impressive second-quarter earnings on July 27, the stock price barely reacted to the report, as the market may have already expected good news. Additionally, the global economy is still shaky, and some economists think the U.S. could go into a recession in 2024. Mastercard's growth depends on global economic growth and consumer spending, so the stock could underperform if investors begin worrying about a declining economy.
Another massive concern is that several regulatory and legal issues continue to linger and threaten Mastercard's business, making Wall Street uneasy. For instance, the Department of Justice in the U.S. launched an antitrust investigation in April 2023 to look into Mastercard's practices in the debit card market. Meanwhile, regulators in the U.K. have also started looking into the fees charged by card networks for each payment made through their network. On top of that, Square, now known as Block (NYSE: SQ), filed a lawsuit against Mastercard and Visa (NYSE: V) in July 2023, alleging that they conspired to fix inflated "interchange" fees and maintain market power. Last, there's a push for a new bipartisan bill called the Credit Card Competition Act that could give merchants more bargaining power and lead to lower fees, potentially hurting Mastercard's bottom line if passed.
The company has a few robust growth initiatives
Mastercard plans to expand the number of people or businesses it can reach, its relevance, and revenue in the evolving digital economy through several growth initiatives. One such initiative is the Mastercard Multi-Token Network (MTN). This platform supports different digital payment tokens, including stablecoins, central bank digital currencies, non-fungible tokens, and other digital assets. MTN provides foundational capabilities that address crucial digital payment industry needs, such as trust in counterparty, trust in digital payment assets, trust in technology, and trust in consumer protections. MTN could attract more customers and partners for digital asset transactions, enhancing Mastercard's earnings and market standing. It stands out as a safer, more adaptable, and compatible option for payment networks, granting its payment system a competitive edge and possibly blunting the impact of regulators attempting to lower its fees.
Another initiative is Strive, a global program that aims to support small businesses and facilitate their growth. Strive plans to onboard 50 million micro and small businesses and one billion individuals to the digital economy by 2025. This initiative could increase the company's revenue and market share by attracting more customers and partners who want to use digital payments and commerce solutions. Strive could also provide a competitive advantage over other payment networks by giving potential customers a more secure, scalable, and interoperable solution than other payment networks for small business transactions.
Is the stock a buy, sell, or hold?
Mastercard has a price-to-earnings (P/E) ratio of nearly 38, above its median P/E ratio of between 35 and 36. Many consider these numbers a sign of a slightly overvalued or fairly valued stock. Additionally, the market values the stock at a 12-month-forward P/E-to-growth (PEG) ratio of 1.74. A PEG ratio is a company's forward price-to-earnings ratio divided by its growth rate. Many people consider a PEG ratio over 1.0 as a sign that the market is overvaluing the stock.
MA P/E Ratio data by YCharts.
While there may be some potential for Mastercard's future growth, significant risks and challenges could impact its performance. As such, investors should hold off on adding this stock to their portfolios until there is more clarity around these issues. While Mastercard may be a solid company with strong financials, the current market conditions and regulatory environment make it a hold for now.
