Why we think investors should buy the dip on Mastercard

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It's been a rough day for credit card stocks, as shares of Visa (V) plunged this morning on the news that Amazon will stop accepting Visa credit cards in the United Kingdom next year, citing high fees. This announcement brought down shares of Mastercard (MA) with it, even though Amazon customers were told they will still be able to use debit cards and non-Visa credit cards like those from Mastercard and American Express. 

Things got even more interesting this afternoon, after Bloomberg reported that Amazon is considering moving its co-branded credit card to Mastercard from Visa. Shares of Mastercard spiked higher and recovered some of today's losses on this news.

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Is Amazon dangling its co-branded credit card as leverage in their negotiations with Visa? Or is this report a sign that Amazon's relationship with Visa has become broken beyond repair?

We still have questions and not enough answers, but this is how we see it.

Implications for Mastercard

If Visa and Amazon can't agree on new terms and Visa refuses to lower Amazon's UK credit card fees, we think it is plausible that Amazon shifts its co-branded business over to Mastercard. Why wouldn't Amazon want to partner with a credit card company it has a healthy relationship with? And Mastercard winning this business would be a major get for them given the popularity of the card and the size of Amazon's retail footprint.

If Visa and Amazon reach an agreement, and the credit card company lowers its UK credit card fees, then it will still be business as usual with nothing changed on Mastercard's end. Remember, Amazon (AMZN) told its customers that they can continue to use Mastercard debit and credit cards in the United Kingdom. Mastercard isn't the one in the crosshairs. Of course, you can make an argument that what's bad for Visa's pricing power will ultimately be bad for Mastercard in the long run, but Amazon must not have problem with what Mastercard charges. Mastercard is being left alone for a reason.

Buying opportunity:

With no real downside case for Mastercard from today's events and a possible upside scenario should Amazon switch its co-branded credit card business over to them, we believe this pullback in Mastercard represents a good buying opportunity.

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