While past results don't guarantee future returns, investors can identify proven winners as a potential hunting ground for solid investment ideas. The thinking is that maybe these businesses can continue their strong performances as we look ahead.
Take Mastercard (MA +0.53%). In the past decade, its shares have soared 487% (as of Sept. 22), crushing the S&P 500 and the Nasdaq Composite Index during the same time period. So a $10,000 investment in this top financial stock in 2013 would now be worth almost $59,000.
I think it's worthwhile to take a closer look at Mastercard's history, as well as its investment merits right now.
Tailwinds helped drive strong financial performance
At a high level, Mastercard essentially operates a communications network that connects a consumer and their bank with a merchant and its bank, facilitating debit and credit card transactions by making them convenient and safe. While Mastercard won't make any money if a transaction is done with physical paper bills, the growth of cashless transactions, which has proven to be a powerful secular trend across the economy, has propelled the business over the past 10 years.
Between 2012 and 2022, revenue soared at a compound annual rate of 11.6%. This growth has been very steady. Besides the 9.4% sales drop in 2020 due to the pandemic, revenue increased at double-digit rates in every year except for one. That's a sign of sustainable, durable expansion.
Besides the popularity of credit cards and their perks and rewards that consumers just can't seem to get enough of, Mastercard has also benefited from the proliferation of the internet and smartphones. For example, the rise of e-commerce helps Mastercard because the buyer and seller are in different locations, so a form of digital payment is necessary. Services like Apple Pay, as well as other digital wallets, can also boost usage of the Mastercard network.
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Key Data Points
The company's historical top line gains have been impressive, but it's Mastercard's ability to exert operating leverage that has likely driven its stock performance. Diluted earnings per share (EPS) in 2012 were $2.19. Last year in 2022, that metric was $10.22, translating to a compound annual rate of 16.7%.
With the business taking a tiny fee off of every transaction that it handles, when it processes a greater dollar volume, the bottom line typically rises faster than revenue. That's because Mastercard has proven to be a very scalable and capital-light enterprise. Capital expenditures totaled under $600 million in the last six months. And each transaction carries almost no marginal costs, which helps explain why the company's overall operating margin is approaching 60%.
By understanding this important information about Mastercard, it's easy to see why the stock has done so well in the past.
Should investors buy the stock right now?
Rising revenue and earnings that continue to benefit from the secular trend of digital payments, coupled with a wide economic moat supported by network effects, means that investors should rush to buy the stock, right? Not so fast. There are some other factors to consider.
Yes, Mastercard's recent financial results demonstrate a business that has momentum on its side. Revenue and diluted EPS were up 14% and 28%, respectively, in the latest quarter, driven by strong cross-border volume. Management even highlighted how resilient consumer spending has been, despite the uncertain economic environment.
And looking out over the next five years, Wall Street appears optimistic, expecting revenue and EPS to rise at double-digit annualized rates. Even though these forecasts should always be taken with a grain of salt, it's still encouraging for investors to see that Mastercard's gains could continue.
But the valuation looks expensive. Shares are trading hands at a trailing price-to-earnings (P/E) ratio of nearly 38. That's not cheap by any means. However, investors who prioritize quality over the P/E multiple might decide to start a small position in Mastercard.
