Warren Buffett has developed an unbelievable track record as the chief executive officer of Berkshire Hathaway. Allocating capital for the conglomerate has led to tremendous returns for shareholders.
Berkshire owns many different stocks that have propelled it over the years. There's one high-quality business, which commands just 0.4% of the overall Berkshire portfolio, that has put up a monster total return of 12,880% since its initial public offering (IPO) in May 2006. That type of performance is hard to ignore.
With this financial stock trading 5% off its peak (as of March 26), should you invest $1,000 in it right now?
An outstanding business
Buffett likes to buy and hold companies that he thinks possess very favorable qualities. There's no denying that Mastercard (MA +0.58%) fits the description.
One reason this is a high-quality business is because it benefits from a secular growth tailwind. In the past decade, cashless transactions have steadily gained ground on cash payments. This directly helps Mastercard, leading to more cards in circulation and greater payment volume.
According to eMarketer, 52% of Americans will not use cash in an average week in 2025. That figure has climbed steadily over the years, but it still leaves plenty of growth potential. In developing parts of the world, the opportunity is even bigger.
Inflation continues to be on investors' minds, particularly with the uncertainty around tariffs. Owning companies that are minimally affected seems like a smart move. Here's where Mastercard shines.
Since Mastercard takes a tiny fee from every transaction that it processes, the business can be viewed as somewhat of an inflation beneficiary. If someone pays more for gas and groceries, for example, the higher dollar figure results in more revenue for Mastercard.
Buffett loves economic moats. Mastercard's network effect is the durable competitive advantage that helps support its industry position. This is arguably one of the widest moats around.
Mastercard has 3.2 billion active cards in circulation that are accepted at 150 million merchants around the globe. This creates a two-sided platform that becomes more powerful and more valuable to every stakeholder the bigger it gets. The more people that hold the cards, the more merchants want to join the network; and with more merchants in the network, the more consumers want to have Mastercards.
The rise of fintech payment services and ongoing development of cryptocurrencies and blockchain technology are risk factors, but Mastercard is so entrenched in the economy that it's difficult to see disruption happening anytime soon.
NYSE: MA
Key Data Points
Incredible profitability
In the past decade, Mastercard's revenue has increased at a healthy compound annual rate of 11.6%. This goes back to the rise of cashless transactions mentioned earlier.
But what's more impressive is Mastercard's profitability. For every dollar in revenue it reported in 2024, 46% flowed to the bottom line as net income. This is an unbelievable margin that points to just how lucrative a business model this is, reducing financial risk for shareholders.
Operating a vast payments platform has proven to be very profitable. Since the technological infrastructure to handle transactions and move data around is already mostly built, handling trillions of dollars in transactions volume results in enormous profit.
Is the stock's valuation compelling?
Mastercard has been a wildly successful investment since its IPO 19 years ago. Even during the past 10 years, the stock has seriously outperformed the S&P 500 index.
However, the trailing five-year period hasn't been so upbeat. Mastercard's 119% total return is slightly below that of the broader benchmark of 500 companies. That track record is certainly disappointing.
It's even more troubling when you consider Mastercard's steep valuation. The shares trade at a price-to-earnings ratio of 40 compared to about 28 for the S&P 500. To be fair, Mastercard deserves to sell for a premium, but the current setup doesn't stack the odds in the favor of investors looking to achieve market-beating returns during the next five years.
Mastercard is an outstanding business. However, it's a Buffett stock best avoided right now.
