MasterCard's Lofty Expectations

Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods, says that each time MasterCard renews a payment contract, "there is risk that the terms aren't as favorable."

MasterCard's five largest clients make up one-third of its total revenue, but the company has been increasing rebate fees to customers and losing market share for the past three years as other competitors become more aggressive in targeting customers.

In addition, the payments industry is consolidating as MasterCard's rivals continued to get gobbled up by large banks. In recent years, Bank of America(BAC Quote) bought rival MBNA, Washington Mutual (WM Quote) purchased Providian, and HSBC(HBC Quote) bought Metris.

"Much of MasterCard's success rests on the shoulders of its partners' executing on their card product offering and successfully signing up bank customers," Sakhrani wrote in a note when he initiated coverage on the stock in December. "These larger players have greater leverage to negotiate discounts with MasterCard which could lead to pricing pressure."

In addition, MasterCard is involved in at least two high-profile legal cases. One involves a merchant lawsuit over so-called credit card interchange rates. The other is an antitrust suit from American Express(AXP Quote) and Discover.

"The trend has been towards declining margins," he says. "They look to offset margin compression on the top line with volume growth, but it's not a sort of one-to-one offset." Sakhrani rates the stock underperform.