Credit is rising sharply despite the global economy going through a period of high inflation. Given this situation, the question arises: is it a good idea to invest in Mastercard stock?
The growth in the cost of goods and services has caused credit card balances to immediately approach pre-pandemic levels because they have posted their highest annual growth rate in 20 years. This is likely to lead to strong profitability for companies working in this sector such as Mastercard.
Credit card balances rising
A report released by the Federal Reserve Bank of New York last week noted that credit card balances recorded the largest increase in two decades.
A couple of years ago, this seemed crazy because the pandemic caused credit card spending to decline. It was a time of uncertainty, so people preferred to save to avoid going into debt in the face of what seemed like a completely dark outlook. However, with the pandemic increasingly forgotten, and despite the global economic problems, credit card usage rose.
The numbers prove it, during the third quarter of 2022, total household debt posted its highest sequential growth of 2.2% since 2007. On a year-over-year basis, total household debt grew by 8.3% and reached a record $16.5 trillion.
There was a substantial 15% rate of increase in credit card balances, followed by a 9% rise in mortgage balances and a 5.5% increase in car loan balances. But, on the other hand, a slight dip was seen in student loan balances. Credit card spending remained strong, with aggregate metrics on credit card accounts increasing by $82 billion.
Late monthly payments, also known as the delinquency rate, are often one of the major drawbacks of using a credit card. Since the pandemic, this rate has been at low levels. While it is true that rates continue to rise, they are still much lower than their historical highs.
Is Mastercard stock a good pick?
As a result, customers will seek out new credit products, and Mastercard may benefit from the increased demand in the context of rising prices.
Mastercard’s third-quarter results were upbeat. The total number of Mastercard and Maestro branded cards grew 5.4% year-on-year to 3.05 billion. There is speculation that these positive results are due not only to strong consumer spending but also to the recovery in international travel.
Analysts expected results were exceeded; earnings, which were expected to be $2.58 per share, came in at $2.68 per share. Revenues were up 15.5% year-on-year to $5.76 billion and there is speculation that the numbers will remain positive for the remainder of the year.
According to Mastercard SpendingPulse, heading into next week’s Black Friday, US retail sales are expected to be up 15% year-over-year, something that has Mastercard’s environment smiling.
The company’s CEO, Michael Miebach, said, “We will continue to monitor impacts related to elevated inflation and other macroeconomic and geopolitical risks. Our diversified business model and ability to modulate expenses position us well to navigate through periods of uncertainty while maintaining focus on our strategic objectives.”
In the US, people are resorting heavily to using credit cards due to the heavy blows that inflation has dealt them. Against the current backdrop, Mastercard delivered impressive results in the third quarter and looks set to continue on that course thanks to spending trends.
For Wall Street analysts, the outlook for the financial services company is very encouraging. They rate the company a “Strong-Buy” rating based on 18 unanimous buys. Mastercard’s average target price of $395.94 implies a 15.2% upside potential from current levels.
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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)