There haven't been many stocks that have performed better than Mastercard (MA +1.24%) in recent memory. Since its initial public offering in May 2006, the credit card payment processor's shares have skyrocketed 9,670% (as of May 6), crushing both the S&P 500 and the Nasdaq Composite Index.
Now, with a market cap of $418 billion, this financial stock has certainly made its early shareholders wealthy beyond their wildest dreams. However, prospective investors who missed the boat might have their eyes on this successful business.
Can Mastercard make you a millionaire one day?
An elite business
When it comes to finding stocks that can make you rich, it's important to try to identify outstanding businesses. Mastercard is one of the highest-quality companies you can find.
It possesses an extremely wide economic moat. Popularized by Warren Buffett, this term means that a business has a set of traits that allow it to defend itself against competition or new entrants in an industry, resulting in impressive financial performance over extended periods of time.
In Mastercard's case, it benefits from powerful network effects. With billions of cards and over 100 million merchant acceptance locations, the platform is invaluable to its stakeholders. It would be almost impossible for someone to create a competing network from scratch.
That's because they'd need to solve the so-called chicken-and-egg problem. Why would merchants want to plug into this hypothetical network when there are no cardholders? And why would anyone want to carry a card in their wallet when no one accepts it?
Mastercard also has sizable growth potential. Between 2018 and 2023, revenue and diluted earnings per share (EPS) soared at compound annual rates of 10.9% and 16.1%, respectively. The gains have been relatively consistent, driven by the rise of cashless transaction methods all across the world. This trend is set to continue for the foreseeable future.
What's worth mentioning is that Mastercard doesn't require much capital to capture this growth opportunity. A carmaker like Ford constantly needs to reinvest billions of dollars in research and development or manufacturing capacity. And streaming leader Netflix must also pour billions in cash each year to produce and acquire compelling content.
Because the payments rails are largely built out, Mastercard can avoid this game. The result is the generation of a lot of free cash flow, to the tune of $1.3 billion in the first quarter of 2024. This allows the leadership team to return capital to shareholders in the form of dividends and stock buybacks.
NYSE: MA
Key Data Points
Not a secret
I think the ideal situation is when investors can scoop up shares of a great business that's going through temporary issues. That's because this implies that the current valuation would be cheap, but over the long term, the company should perform well as it gets back on strong footing. As it generates improved financial results, the market should reward the stock with a higher valuation.
Unfortunately, Mastercard doesn't fit this category. This business isn't facing any challenges. In fact, it continues to produce strong financial results. In the latest quarter, revenue and EPS jumped 10% and 30%, respectively, boosted by strong cross-border payments activity.
Consequently, the valuation looks expensive at a current price-to-earnings (P/E) ratio of 35.7. That multiple is cheaper than the stock's trailing 10-year average. However, it represents a significant premium to the broader S&P 500's P/E ratio of 22.6.
The valuation might be justified, given the quality of this company. Mastercard can allow its shareholders to sleep well at night, as there isn't much volatility in the underlying business's result.
Let's return to the original question of whether or not the stock can make you a millionaire one day. I believe that it can. Investors who can allocate more upfront capital and that have a very long time horizon will raise their chances of hitting a seven-figure portfolio balance from owning Mastercard.
