Because of all the attention that the dominant and high-flying tech firms are getting these days, Mastercard (MA 1.84%) might fly somewhat under the radar. But that doesn't mean this business isn't worthy of your consideration. Quite the opposite.
Shares have soared 496% in just the last decade (as of March 5). That gain crushes both the S&P 500's and Nasdaq Composite's returns by wide margins. It might be a similar story going forward.
Even though this financial stock is near its all-time highs, I think it still makes for a smart investment candidate. Here's why.
Never skipping a beat
The last few years have been unusual from an economic standpoint. Higher interest rates and inflationary pressures have created an uncertain macro environment, making things challenging for many companies.
Mastercard stands out from the crowd. It reported revenue growth of 13% in 2023, driven by a 12% rise in payment volume. CEO Michael Miebach credited "healthy consumer spending" on the Q4 2023 earnings call.
This company's ability to produce outsize profits shouldn't be ignored. In the last five years, Mastercard's net profit margin has averaged an exceptional 45%. This allows management to pay dividends and buy back stock.
There's no reason to believe that its strong fundamental performance is coming to an end anytime soon. According to Wall Street analyst estimates, Mastercard is projected to increase revenue and adjusted earnings per share at compound annual rates of 12.2% and 16.8%, respectively, over the next three years. This would simply just be a continuation of historical trends.
Industry tailwinds support this positive outlook. In the U.S., more than half of people still use cash for some or all of their transactions in a typical week, according to a 2022 Pew Research report. In less developed parts of the world -- like Asia, Latin America, and Africa -- there is a significant runway for cashless payment methods to grow in popularity. This will boost a business like Mastercard in the decade ahead.
NYSE: MA
Key Data Points
A safe business to own
When investors look for companies to buy and hold for the long haul, I believe identifying an economic moat is of the utmost importance. Businesses that possess traits that protect them from competitive threats are in a position to stay atop their industries for many years to come.
With its powerful network effect, there's no question that Mastercard falls into this category. More than 3 billion of its cards are accepted at over 100 million merchant locations, creating a two-sided platform that gets stronger as it gets larger. Mastercard has become such an integral part of the global economy that it would be virtually impossible for a new entrant to even come close to challenging its standing.
Even as new fintech and payment enterprises have emerged, in addition to cryptocurrencies and blockchain technology, Mastercard's financials haven't taken a hit. This speaks volumes about just how high quality this business really is, with there being minimal risk of disruption.
Putting the valuation in context
Thanks to its impressive historical performance, shares of Mastercard don't look like a screaming bargain at first glance. They trade at a forward price-to-earnings ratio of 32.5, which is more expensive than bigger peer Visa, while also representing a huge premium to the S&P 500. Some investors might find this price tag reason enough to avoid the stock.
But that might be a mistake. Based on what I've outlined above -- namely, the steady and consistent growth and profitability trends, as well as a powerful competitive position -- I think Mastercard's valuation is totally justified. Over the long term, investors should be rewarded.
