Over the years, Mastercard (NYSE: MA) has done nothing but reward its investors. Since the company's initial public offering (IPO) in May 2006, shares have skyrocketed, rising 12,160% (as of Feb. 3). A $1,000 investment would be worth $122,600 today.
That gain is hard to overstate. Even these days, Mastercard continues to put up strong financial results. For prospective investors, is this top financial stock still a buy?
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Growing the top and bottom line
Investors will appreciate Mastercard's ability to steadily grow. The prevalence of cashless transactions, at the expense of using physical cash, benefits the business. In the U.S., about half of Americans still use cash for some or all of their weekly purchases. This data shows that there is still a sizable runway for Mastercard, even in a very developed economy that has a robust payments and financial services infrastructure.
This has resulted in revenue growth of nearly 200% between 2014 and 2024. During that decade, the business only registered one down year, which was in 2020 due to the pandemic. Mastercard gets a lift from more payment volume and active cards over time.
That sales trajectory has resulted in impressive bottom-line gains as well. Mastercard's diluted earnings per share (EPS) rose 17% in 2024. In the past 10 years, it has increased at a compound annual rate of 16.2%. This trend is precisely what has supported the stock's climb.
Mastercard's positive traits
The company's profitability is outstanding. In fact, this is one of the most financially lucrative enterprises in the world. Last year, Mastercard generated net income of $12.9 billion. That translated to a fantastic profit margin of 45.7%.
This allowed the business to report stellar free cash flow to the tune of $13.6 billion in 2024. Mastercard operates an asset-light model that doesn't require a lot of capital expenditures to grow. The communications protocol that connects merchants, consumers, and financial institutions is already largely built out. Every additional transaction that runs through the protocol carries a high return on invested capital.
Supporting Mastercard's economic moat is the presence of network effects. There are 3.5 billion cards in use across the globe that are accepted at 130 million merchant locations. More cards equal greater value to merchants looking to target a wide customer base and grow their sales. And more acceptance locations means that consumers have more places to spend. The bigger the network becomes, the more useful it is to everyone.
I'd argue that Mastercard's competitive position is virtually unassailable despite the top fear many shareholders might have of ongoing regulatory risks. The payments platform is critical to the smooth functioning of our economy. And it provides a safe, convenient, and fast way to handle transactions. That setup is hard to disrupt.
Is valuation important?
In the past decade, Mastercard shares have traded at a price-to-earnings (P/E) ratio of 37.9. That's not a shocker. This is an outstanding company, so it generally sells for a premium valuation. For comparison's sake, the S&P 500 trades at a P/E multiple of 25.5. As of this writing, Mastercard is 7% more expensive than its trailing-10-year average.
According to Wall Street consensus analyst estimates, Mastercard's EPS is projected to increase at an annualized rate of 14.1% between 2024 and 2027. That outlook is reasonable, in my opinion, given that it's in line with the company's past averages.
But does that growth forecast warrant paying almost 40 times earnings for Mastercard? I don't think so. Investors looking to score market-beating gains might want to wait for a better valuation before buying the stock.
Should you invest $1,000 in Mastercard right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
