Besides the piles and piles of lawsuits that await the credit card behemoth, there is another risk to Mastercard's growth outlook over the long term: its own customers, namely banks and financial institutions (for the sake of discussion, Mastercard's "buyers"). They've been consolidating at breakneck speed and will continue to consolidate. When buyers merge, someone's bound to lose out.
It's Michael Porter all over again: In his seminal book Competitive Strategy, Porter clearly states that as firms join hands and get bigger, they begin to wield more muscle against others in the value chain. Buyers have higher bargaining power when a market is characterized by a few large buyers and many suppliers. Buyers also wield power through what's called the backward integration threat, which is the threat that a buyer will swallow a producing agent. Citigroup (C) can snap up a credit card company in one second; it's highly unlikely, however, for a credit card company to eat a bank.
As more buyers concentrate to gain market share, the worse off Mastercard will be. Certainly, Mastercard enjoys a wide moat and it is not competeing against many other credit card companies, but the possibility of banks "setting the price" and killing the margins of credit card issuers remains. What this means for Mastercard is that its margins will compress as more and more financial institutions decide to tie the knot. Banks will use their size to seek the best deal, all to the detriment of Mastercard's business model.
Don't get us wrong, though. Mastercard over the next 6 months is a compelling buy. There are still dozens of funds waiting in line to buy the stock, as well as throngs of analysts waiting to initiate coverage. Long term, however, we think you're better off spending your money on that coveted Angelina Jolie photo you saw on eBay.