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3 Reasons MasterCard Stock Could Fall

By Dan Caplinger - Jan 27, 2016 at 8:39AM

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The card company has done well lately, but that doesn't ensure the good times will last.

Image: MasterCard.

Global card-network company MasterCard (MA -1.09%) has produced amazing results for shareholders since it went public, averaging annual returns of more than 26% since early 2007 and even slightly outpacing rival Visa (V -1.21%) over their joint histories as publicly traded companies. Past performance doesn't guarantee future results, though, and there are situations that MasterCard is facing that could cause its stock to fall if things don't turn out the way the company hopes. Let's look at a few reasons why MasterCard shares could drop in 2016.

1. MasterCard could start to lose the online payment race.
Credit and debit cards have been MasterCard's bread and butter for decades, but the move toward electronic payments has threatened the franchises that it and Visa have created. PayPal (PYPL -2.61%) in particular has jumped into online and mobile payments in a big way, and so far, the company has managed to fend off MasterCard and Visa's efforts.

MasterCard hopes to change that by pushing its MasterPass solution, which competes with Visa Checkout and PayPal. PayPal's latest results show no suggestion that MasterCard is eating into its growth, and the traditional credit card companies actually have to overcome some negative sentiment associated with their long histories among younger mobile users. To defend its turf, MasterCard will have to overcome a huge first-mover lead from PayPal and make MasterPass ubiquitous across the e-commerce world.

2. MasterCard might not get the lucrative co-branding partnerships its rivals get.
One key aspect of competition in the card arena is working with partners in the retail world to tie store-branded cards to a major payment network. The coup that Visa scored in wooing away the branding partnership of Costco Wholesale away from American Express was a huge victory for Visa and sent American Express' share price into a tailspin from which it still hasn't fully recovered.

MasterCard has gotten its share of co-branding partnerships over the years, but it needs to make sure it keeps up with Visa to support its own brand awareness. Otherwise, it would be easy for cardholders to give MasterCard second-class status behind Visa, and that could create a downward spiral for MasterCard at the same time that it would boost the positive network effects that Visa would enjoy.

3. International economic woes could hurt MasterCard's performance abroad.
For years, one of MasterCard's big advantages has been its larger exposure to the international arena. Over the long run, that has given MasterCard greater opportunities to grow, especially when emerging market economies were performing well. Now, though, many of the economies that led the global growth engine forward have stalled out, and that poses a bigger threat to MasterCard than it does to rivals like Visa that have less international exposure.

Already, we've seen some impact from global macroeconomic conditions on MasterCard from the strength of the U.S. dollar. In its most recent quarter, MasterCard said that weakness in foreign currencies cost it 10 percentage points of revenue growth, and even though the company suffered a decline in net income, its earnings per share would have jumped by 11% in a currency-neutral environment. Yet the saving grace for MasterCard was that its international markets were strong in local-currency terms. If an economic downturn reverses that trend, it could spell much bigger trouble for MasterCard.

MasterCard's track record of past success has shown up in its impressive share-price performance. Even though the company has the ability to overcome the obstacles described above, they're still threats that could endanger the stock price in the future and that everyone should therefore consider in their decisions about owning the stock.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MasterCard, PayPal Holdings, and Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Mastercard Incorporated Stock Quote
Mastercard Incorporated
$355.33 (-1.09%) $-3.92
Visa Inc. Stock Quote
Visa Inc.
$214.52 (-1.21%) $-2.62
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$99.42 (-2.61%) $-2.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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