Berkshire Hathaway, the conglomerate headed by famed investor Warren Buffett, has a huge public equities portfolio currently valued at more than $350 billion. Investors analyze this list of companies to find worthwhile investment opportunities, which seems like a good idea given the Oracle of Omaha's stellar track record. 

But of the dozens of stocks that Warren Buffett owns, I'm most excited about Mastercard (MA -0.22%), which makes up just a tiny 0.5% fraction of Berkshire's overall portfolio. 

Strong financials 

Anyone who follows Buffett would know that he has a liking for companies that are in favorable financial positions. Just look at Apple, which is Berkshire's largest holding by far. The tech behemoth generated more $110 billion of free cash flow (FCF) last fiscal year and currently has $57 billion of net cash on the balance sheet. The benefit of this is that the business has virtually no chance of running into any financial troubles. 

However, even the iPhone maker doesn't have the lofty profitability metrics that Mastercard does. During the latest quarter, the card payments giant posted an operating margin of 58.3%, which is just outstanding and compared favorably to Apple's 29.2% as of the end of June. And Mastercard's FCF generation of $4 billion in the first six months of 2023 equated to 33% of revenue during the period. 

The latest financial results are also impressive, especially when you consider the uncertain economic environment we are in. Mastercard's revenue and diluted earnings per share (EPS) jumped 14% and 28%, respectively, year over year. The key to this was momentum in cross-border payments, which were up 24% from Q2 2022, thanks to robust travel demand. 

But this strong performance is nothing new, as Mastercard has a long history of financial success. In the 10-year period between 2012 and 2022, sales rose at a compound annual rate of 11.6%, and diluted earnings per share increased at an annualized clip of 16.7%. It's no wonder the stock has climbed 540% in the past 10 years (as of Sept. 11). 

Diversifying revenues 

Mastercard's chief business line is processing electronic payments, collecting fees anytime one of its 2.8 billion cards is swiped at tens of millions of merchants around the world. In fact, in the past three months, the business handled $2.3 trillion of payments volume, second only to Visa. This model of running an asset-light payments network has clearly been lucrative, as I noted earlier regarding the financial picture. 

And the added benefit is that Mastercard's revenue is essentially hedged against inflationary pressures. This means that if cardholders have to pay more for things in their daily lives, like gas, groceries, or travel and entertainment, Mastercard gains with the promise of higher revenue potential. I'm sure Buffett appreciates this. 

In recent years, Mastercard has been expanding its segment called "value-added services and solutions," which includes offerings like cyber and intelligence, data and services, and processing and gateway solutions. All of these are geared toward providing financial institutions, merchants, and governments with the tools and capabilities necessary to better operate in a world that is only going to become increasingly digital. Revenue in this segment totaled $2.2 billion in the most recent quarter (35% of Mastercard's total), up 17% year over year -- faster than the growth of the overall company. 

A reason to be cautious 

It's not all good news, however. Perhaps the most obvious reason that Berkshire and Buffett don't own much more of Mastercard is its current valuation. The shares trade at a steep price-to-earnings ratio of 39. While a business of this caliber certainly deserves to sell at an above-average multiple, the current valuation is still more expensive than the trailing-10-year average for the stock.  

Mastercard is no doubt an outstanding company, but maybe it's best for investors to wait for a better entry price, or even follow in Buffett's footsteps and initiate just a tiny position to start.