A sliver of positive news from the Federal Reserve and an earnings beat were not enough to lift shares of Mastercard (NYSE:MA), as the credit-card giant traded lower after posting its Q1 earnings results on Wednesday afternoon.
The company’s solid results also signaled that consumer spending has not yet been significantly impacted by inflation ticking up. Yet, Mastercard stock fell on Thursday, slipping about 1% as of 12 p.m. Eastern to $441 per share.
Meanwhile, the overall market was having a good day, with all of the major indexes trending higher. It may have been fueled by comments from Fed Chair Jerome Powell on Wednesday suggesting that a rate hike was unlikely.
Mastercard’s decline likely had to do with an outlook that reduced its forecast revenue growth for 2024, but was that enough to warrant concern? Let’s take a look.
Consumer spending still robust
First, the good news: Mastercard had a solid quarter, which shows that consumer spending is still strong. Revenue jumped 10% to $6.3 billion while net income rose 28% to $3 billion, or $3.22 per share.
Mastercard managed to keep its expenses in check, resulting in a 2.2-percentage-point increase in its operating margin to 56.8%. That means this highly efficient business generated nearly 57% profit on every dollar of sales after deducting expenses.
Mastercard makes most of its revenue on fees every time a card is used, so when spending rises, it generates more income. In the first quarter, all three of the key spending metrics were up significantly year over year. The gross dollar volume of money spent by Mastercard users surged 10%, while cross-border volume, which consists of fees for international transactions, climbed 18%. Switched transactions, which are fees for processing and settling transactions, surged 13%.
“Our momentum continued this quarter, as we delivered strong revenue and earnings growth powered by healthy consumer spending, strong cross-border volume growth of 18% year over year, and new deal wins in every region,” said Mastercard CEO Michael Miebach in the earnings report.
There had been some concern about consumer spending, given that inflation rose in March and the Consumer Confidence Index for April fell for the third straight month. However, this may be the reason why Mastercard lowered its outlook somewhat, projecting net revenue increases for fiscal 2024 to be in the low end of its outlook for the low double-digits, down from the previous outlook of the high end of low double-digit growth.
No dramatic impact from antitrust settlement
Investors may also be wondering about the impact of a $30 billion settlement that Mastercard and Visa reached in March in an antitrust lawsuit filed by merchants.
In short, the two credit-card giants will be required to roll back swipe fees for merchants by at least four basis points for at least three years. Further, for five years, the average swipe fee must be at least seven basis points below the current average rate. The settlement also removed anti-steering restrictions and increased the ability of small merchants to negotiate fees.
Miebach did not talk much about the impact of the settlement on the earnings call, but he did call it a “relief” that it was over.
“Basically what happens is we’re going to have a mild reduction of interchange rates, number one, and we’re providing more clarity and simplification around surcharging rules and discounting rules on one hand,” Miebach said on the earnings call. “We don’t expect any dramatic impact on the business from the interchange changes. And for merchants, we will see what choices they make on surcharging and on discounting. We’ve seen in the past that surcharging is not always clear to consumers.”
Mastercard’s report was viewed mostly negatively by analysts, as most lowered their price targets slightly on the uncertain economic environment, the potential impacts of the settlement, and the slightly reduced revenue-growth projections.
I don’t see these headwinds as enough to change my view much on Mastercard. The settlement could have a slight impact, but overall, this is a great stock that is reasonably valued and has been remarkably resilient through various economic and market cycles. It still looks like a solid buy.
