There are some businesses out there that perform so well on a consistent basis that investors might take them for granted. They even might be boring, so sometimes they can fly under the radar.
I believe Mastercard (MA 0.96%) is one such company. In the last decade, the financial stock has climbed 455%, a gain that trounces both that of the S&P 500 index and the Nasdaq Composite Index. Shares have done nothing but reward investors.
So, is Mastercard stock a buy right now?
Mastercard is an elite business
Mastercard operates one of the largest card payments networks in the world. In the 2023 third quarter, the business handled a whopping $2.3 trillion of payment volume, giving it a second-place position in terms of global market share, behind only Visa.
Mastercard collects fees anytime its cards are used as a method of payment. The company doesn't extend credit; therefore, it's not exposed to default risk like traditional banks are.
This just might be one of the best businesses out there. It's not hard to see why.
Mastercard is a mission-critical company that facilitates the smooth functioning of commerce and the economy in the markets it's in. Just imagine for one second what you would do if you weren't able to use your credit or debit cards. This situation would cause trouble not just for you, but for the enterprises and governments that depend on Mastercard as well.
The sign of a great business is the presence of an economic moat, something Warren Buffett has made popular in the investment community. Mastercard's moat stems from powerful network effects, which might be the strongest competitive advantage there is.
You and many people you know probably have a Mastercard-branded card. Why? It's because Mastercard is accepted virtually everywhere that credit cards are.
But why are Mastercard's accepted virtually everywhere? It's because the vast majority of consumers have one in their wallet.
Because there are so many Mastercards in circulation around the world, coupled with so many merchant locations that accept them, the payments network only becomes more formidable over time. Consequently, Mastercard's competitive position faces minimal disruptive threats.
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Key Data Points
Growth and profits
Many investors easily fall in love with companies that have rapid growth. This is understandable, given that these businesses could produce strong stock returns. The issue, though, is that huge revenue growth is typically unsustainable.
Mastercard is different. It has had steady top-line gains in recent years. Between 2017 and 2022, revenue increased at a compound annual rate of 12.1%. And through the first nine months of last year, Mastercard sales rose by 13%. Besides 2015 and 2022, every year in the last decade saw a double-digit percentage gain. The consistency is impressive.
Mastercard has a presence in more than 210 countries and territories, many of which are emerging markets, where cash is still a very popular method of payment. This means there's still lots of growth potential for the business as we look ahead.
I haven't even touched on the company's ridiculous profitability. During Q3, Mastercard reported a net profit margin of 45%. This figure showcases how lucrative the scalable payments platform has become. Because it costs virtually nothing to process every additional transaction, margins should continue their stable trend of expansion.
Is the valuation expensive?
Mastercard stock's historical outperformance has made things more difficult for prospective investors. The shares trade at a price-to-earnings (P/E) ratio of 38, which doesn't appear to be cheap by any means. And this is a far cry from the P/E multiple of 28 Mastercard dipped to during the 2023 bear market. We might never see this below-30 valuation again.
But does this mean it's best to avoid the stock? I don't necessarily think so. This is clearly an outstanding business. In this instance, it could still be smart to pay up for Mastercard stock.
