Payment network Mastercard (MA 0.27%) has done very well for shareholders, despite playing second fiddle to archrival Visa. A mere $1,000 invested in Mastercard at its IPO in May 2006 would be worth over $104,050 today.
Today, Mastercard is one of the world's largest financial companies, worth over $412 billion in market cap. Now that it's a behemoth, future investment returns probably won't be as lucrative.
However, Mastercard can still be an excellent stock to buy and hold, depending on the answers to three crucial questions. Here are the questions and some potential answers for investors interested in this fintech stock.
Is Mastercard still growing?
Mastercard is one of the world's leading payment networks. It's the line of communication between a merchant or point of sale and the banks or lenders that hold your money. The company makes money by charging a small fee on each transaction on its network. Over time, consumers have gradually shifted away from cash to noncash payment methods like debit and credit cards and online payments.
NYSE: MA
Key Data Points
This has fueled many years of growth for significant payment networks like Mastercard. Since Mastercard's fee is a percentage of the payment volume it processes, it can be lumpy at times when consumers cut back or spend more. However, over the past decade, revenue has grown at an average of 12% annually.
Ironically, Mastercard's most recent growth is above its long-term averages, which is impressive considering annual revenue is over $24 billion today.
MA Revenue (Quarterly YoY Growth) data by YCharts
It's a similar story for earnings. Mastercard has outpaced its long-term averages in recent years. Some may be a bump from the COVID-19 stimulus in 2020 to 2022, but it's still great to see. To answer the question, yes. Mastercard is still growing its top and bottom lines just fine.
2. Can Mastercard still handle the competition?
When you boil it down to the basics, investing is about finding companies that continually create value. In other words, can a business keep making more money despite competition biting at its heels?
Mastercard is one of a tiny circle of prominent payment networks. That group generally includes Visa, Mastercard, American Express, and Discover (outside China). It's even smaller in America, where Visa and Mastercard dominate the market, according to research by The Motley Fool.
MA Return on Invested Capital data by YCharts
Which banks and lenders issue which brand of payment card depends significantly on agreements they make with the payment networks, so tracking how Mastercard is holding up isn't easy. But one of my favorite metrics, return on invested capital (ROIC), can help provide some answers.
Investors should want to own companies with a high ROIC because it means they're efficient at making money. When you can put a dollar into a business and get $1.50 out, it's a sign that the business is efficient and profitable. Competition isn't squeezing your financials.
I typically look for rates above 15%, and as you can see, Mastercard passes that benchmark quite easily. It's a sign of a high-quality business.
3. Is Mastercard stock reasonably priced?
The world's most fabulous company can be a lousy stock if you overpay for it. Investors should know that valuation always matters. Fundamentally speaking, Mastercard is a great business that's still growing at a healthy pace.
Here is where you need to be careful. Most investors know how awesome Mastercard is, so the stock routinely trades at a high valuation. Currently, that's a forward P/E of almost 31.
MA EPS LT Growth Estimates data by YCharts
Analysts have steadily lowered their growth estimates since those estimates peaked in mid-2021. That could be due to stimulus money drying up, putting more pressure on consumers' wallets. Still, Mastercard is looking at long-term earnings growth averaging over 15%.
To gauge how attractive that looks, I use the PEG ratio. It compares valuation to growth to contextualize how much an investor pays for a stock's growth. I look for PEG ratios of 1.5 or less, and Mastercard is sitting just above that at an even 2.0.
The verdict is in
Mastercard is a market-beating stock with the fundamentals and growth to remain a stellar long-term investment. While the stock might be a bit expensive today for the growth you're getting, an investor thinking years out will probably be fine buying the stock here and letting the company grow into its valuation.
Feel free to dollar-cost average so you have some cash left to take advantage of a sale if the market gets shaky and sends shares lower.
