Mastercard Exceeded Earnings Expectations, But Will Consumer Spending Remain Resilient?

Key takeaways

• Mastercard’sMA
  numbers were stronger than anyone was expecting for Q4 2022
• The company has an optimistic outlook for 2023, predicting that consumer spending will stay strong thanks to a solid American labor market
• Investors don’t appear to be buying the optimism, as concerns of a future recession have largely proliferated among the American public

Mastercard released some great numbers in its Q4 2022 earnings report, and executives shared a rosy view of the future. However, stocks tumbled after last week’s earnings call and haven’t been on an upward trajectory since.

Investors seem to be questioning the future Mastercard execs are predicting. While the company projects that consumer spending will be strong in the near future, there is some concern that, in actuality, these numbers will go down in the coming months as the Fed continues its rate hikes and potentially endangers the job market.

There are a few other investor concerns as well. Here’s everything you should know, and how Q.ai can help.

Most of Mastercard’s numbers were up

Almost all of Mastercard’s numbers were up for Q4 2022. Net revenue was up 17% year-over-year and net income increased to 16%. Operating income was up 19% over the same period, though operating expenses also rose to 13%, with three of those percentage points coming from acquisitions.

The two notable areas where the numbers were down were attributable to the two economic wildcards of the year. These include Russia and China.

Mastercard ended its business in Russia after the invasion of Ukraine in March 2022. The impacts of this loss are expected to end after Q1 2023. Unfortunately, with the way the numbers pan out, it’s expected to have a larger impact on metrics in Q1 2023 than in Q4 2022.

The company attributed a good portion of its Q4 2022 success to the near-restoration of cross-border travel in all markets. This excluded the Asia Pacific region, most notably China. Spending in the People’s Republic has not returned to pre-pandemic levels. Travel has also not rebounded, with inbound travel at 20% of 2019 levels and outbound travel at just 50%.

While that may change in the coming year, revenue from China only made up 1% of the company’s inbound cross-border travel volumes before the pandemic and only 2% of outbound volumes.

Strong consumer spending

Mastercard cited strong consumer spending as one reason for its numbers in Q4 2022. It is projecting this trend will continue throughout 2023, citing a low unemployment and strong wage growth.

These assertions don’t totally square with expectations for the overall economy. First, the Bureau of Economic Analysis had personal consumption expenditures (PCE) down by 0.2% in December 2022 and down by 0.3% in November 2022. However, it was up in the three months prior.

What’s more, the Fed has targeted wage growth as a way to further lower inflation while simultaneously acknowledging that it was not a causal factor in the rise of inflation. This could negatively impact the job market, though the Fed is still trying to pull off a soft landing.

Regardless, in the Q4 2022 earnings call, Mastercard executives remained bullishly optimistic on this front.

More people are incurring foreign transaction fees

More people traveling means Mastercard has additional opportunities to charge foreign transaction and other cross-border fees, which significantly contributed to net revenue in Q4 2022. The company says that travel has returned to pre-pandemic levels in all markets except for the Asia Pacific region.

New Contracts

The company did spend some money on acquisitions in 2022, but it also secured some hefty new contracts. For example, Mastercard will now be the exclusive payment provider for Citizens. It also deepened its business relationships with Citi, Bank of AmericaBAC
and Chase.

Looking forward

Although the Q4 2022 numbers were higher than expected, Mastercard’s stock fell after the earnings report release. Part of that is because of skepticism in the media and investor sentiment that consumer spending will truly continue to trend upward or even stay on its current track.

Another reason for the concern was that even though the company’s projections for 2023 revenue growth was about on par with analysts, its projections for operating expense growth was slightly higher than what analysts were predicting independently.

During the earnings call, one investor asked about an increase in travel in the future, as there is still a general view of pent-up demand, especially as prices on airline tickets are currently so high thanks to limited airline capacity.

The CFOCFO
, Sachin Mehra, didn’t pretend to know the future but said that the company was not expecting further tailwinds thanks to pent-up travel demand. Instead, he noted that when the problems in the airline industry are alleviated, he would expect prices to come back down as there would be more supply to meet demand. While volume may increase, the sales Mastercard collects a percentage of would be smaller, ultimately evening out.

In addition, the FTC has issued orders for the company to stop blocking payments from competitors’ debit cards and payment networks. Being in trouble with the FTC is never a good look from an investor standpoint.

The bottom line

Despite the surprisingly strong Q4 numbers, Mastercard stock continued to fall through January 30, 2023, closing at $371.12. While the price dip was disappointing, it was only about $10 off from last year’s peak of $382.51 on January 28, 2022. In the time between, Mastercard stock experienced a steep dip down to a bottom of $284.34 on September 30, 2022.

Hopefully, executive optimism will pay off in the year ahead. But, at least in the initial days since the report was released, investors aren’t betting on it.

Fortunately, large-cap companies like Mastercard are better resourced to handle tricky economic environments. This means whatever happens in 2023, they’re likely to be able to weather it. You can invest in large-cap companies using the Large Cap Kit from Q.ai. In times of economic uncertainty, you can even turn on Portfolio Protection for further peace of mind.

Download Q.ai today for access to AI-powered investment strategies.