As the economy continues adjusting to higher interest rates, easing inflationary pressures, and the continued possibility of a recession this year, it's business as usual for Mastercard (MA 0.07%). In 2023, the card payments giant reported that revenue and diluted earnings per share (EPS) increased 13% and 16%, respectively. This demonstrates that consumer spending remains robust, while at the same time proving that this business is simply just in an advantageous position compared to most others out there.
Is Mastercard stock, which is up 7.5% so far in 2024 and trading near all-time highs, worth buying today?
Look at Mastercard's valuation
In the last decade, Mastercard shares have returned 567%, including dividends. The S&P 500, over the same timeframe, returned 240%. That's strong outperformance. Even when the market tanked in 2022, Mastercard's stock only dipped by 3%. This business is gaining a reputation for taking care of its shareholders regardless of the broader economy.
Because of its strong performance, the stock trades at a premium valuation. The current price-to-earnings (P/E) ratio of 38.9 is much more expensive than the average P/E of either the S&P 500 (P/E of 22) or the tech-heavy Nasdaq-100 index (P/E of 30.9). From a prospective investor's viewpoint, it might not be a good time to scoop up shares today.
But before passing up on Mastercard, understand that the company has grown its revenue and diluted EPS at compound annual rates of 11.7% and 16.5%, respectively, over the last 10 years. And the continuation of its strong financial performance in uncertain economic times shows that this is a top-tier enterprise.
Over the next three years, Wall Street consensus-analyst estimates call for sales to rise at a yearly clip of 12.1%, with diluted EPS expanding at an annualized pace of 16.9%. It's usually a smart idea for investors to take any estimates that Wall Street analysts provide with a grain of salt. The world is simply too unpredictable to accurately call what's going to happen in the future.
Mastercard has unrivaled durability
But I think those forecasts for Mastercard are in the right ballpark because they're in line with the past 10-year averages. Moreover, this is truly an outstanding business given that it faces minimal threats to its competitive standing. There are a lot of reasons to have confidence that Mastercard can continue performing well from a fundamental perspective in the years ahead.
Consider the company's huge scale. Mastercard's nearly 3 billion cards are accepted in 210 countries and territories worldwide at millions of merchants. This creates powerful network effects where more cardholders make the platform more valuable for merchants. And more merchants accepting Mastercard as a form of payment creates more value for cardholders.
The company's payments network is so ingrained in our society that I believe there is a minimal risk of disruption. Consumer behavior would have to change drastically, with credit card usage declining. There's no reason to believe this is going to happen.
Just look at Citigroup, a major issuer for Mastercard. The bank reported a 9% increase in branded card-account acquisitions in the last three months of 2023. And this partly helped lead to cards in circulation for Mastercard growing by 248 million last year, translating to a 9.2% bump.
Even in uncertain economic times, Mastercard's network is expanding. Consumers just love using their credit cards. This is likely to be the case a decade from now.
On the surface, the stock looks expensive. However, once you learn more about this company, you'll probably wonder why you don't own shares. Perhaps the best strategy is to dollar-cost average over many months to take advantage of various price points. And then plan to hold for several years to let compounding work its magic.
