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The Ratings Game: Visa, Mastercard stocks downgraded as analyst worries about macro clouds

Visa Inc. and Mastercard Inc. showed resilient spending trends in their latest earnings report, but one analyst worries that a gloomier chapter is on the horizon.

Piper Sandler analyst Chris Donat issued rare downgrades of the two payment-technology giants Friday, lowering his rating on Visa

to neutral from overweight and cutting his rating on Mastercard

to underweight from neutral.

“While we think that MA and V have beautiful business models, these models operate in the broader global economy,” Donat wrote. Taking into account insights from Piper Sandler’s macroeconomic team, he is now “increasingly concerned that Europe could enter a recession in 2023.”

Europe is Mastercard’s largest market, according to Donat, and it’s Visa’s second largest. The fear is that a recession in Europe would crimp transaction activity, profits, and valuation multiples.

Beyond Europe, Donat is worried that underperformance in the card networks’ Asia businesses “might represent a ‘new normal’ that lasts for years.” He’s also concerned about potential negative impacts of the macro climate more broadly.

“We believe inflation and other macro factors could decrease discretionary spending and ultimately slow cross-border activity,” he wrote.

Executives from Visa and Mastercard both shared on their earnings calls this week that the companies had yet to see negative spending impacts due to inflation or geopolitical tensions.

“Net-net, historically, inflation has been positive for us,” Visa Chief Executive Al Kelly said on the company’s earnings call.

See more: Visa stock gains after earnings as company says inflation, Ukraine war aren’t crimping spending

“Moderate inflation is something that provides us a modest tailwind,” Mastercard Chief Financial Officer Sachin Mehra told MarketWatch, though he said that periods of high inflation or hyperinflation might not carry the same benefits.

Read: Mastercard says travel is snapping back faster than expected amid earnings beat

The two companies acknowledged that the recovery in Asia largely has trailed that in other regions.

Both companies saw their latest results benefit from surging growth in cross-border spending, which occurs when someone uses a card issued in one country while shopping with a merchant who’s based in another. Cross-border spending includes e-commerce spending, which was strong during the pandemic, and spending related to international travel, which is bouncing back as more countries relax pandemic-related restrictions. Overall, it tends to be a “higher-yielding” type of spending volume for the card networks.

In discussing what might prove his case wrong, Donat pointed to the possibility that the “cross-border recovery solves other problems.”

“We view the most important swing factor for MA and V as high-margin cross-border revenue,” he wrote. “The pandemic depressed cross-border activity. A global recovery—or even recovery in most corridors—would likely overwhelm any domestic slowdowns in large regions.”

Of the 37 analysts tracked by FactSet who follow Visa’s stock, just five have neutral ratings, and the rest are bullish. Of the 36 who cover Mastercard, only Donat has a bearish rating. Three other analysts rate the stock the equivalent of neutral, and the other 32 have bullish ratings.

Visa shares are down 2.1% in Friday’s session, while Mastercard shares are off 3.2%.

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