Over the past five years, Mastercard (NYSE: MA) stock has generated a total return of 77%. That's a respectable gain, but it lags behind the 113% total return of the S&P 500. Zoom out further, though, and you'll see that Mastercard has trounced the market. It's up a whopping 11,180% since its initial public offering in May 2006 (compared to 534% for the S&P 500).
So the past five years have underperformed, but the stock is still a long-term outperformer. It's no wonder some investors are wary while others might have their sights set on this stock. But all of them are asking where will this stock be over the next five years. Will its performance mimic the past five years, or the past 18? Let's see if we can find an answer.
Mastercard's momentum to continue
When comparing Mastercard to other fintech stocks, you might get the impression that it's a relatively boring company that just hums along, with no meaningful changes to its operations from year to year. That consistency, however, is one of its positive traits.
Mastercard performs well as a company -- probably so much so that investors take it for granted. In the past five years, its revenue and diluted earnings per share climbed at annualized rates of 11.3% and 11.8%, respectively. These rates of gains, while solid, help partly explain why shares underperformed the broader market. It also didn't help that the stock's price-to-earnings (P/E) ratio dipped 15% during that time.
However, the rise of cashless transactions continues to propel the business and will keep doing so in the future. Compared to cash, using credit and debit cards tends to be safer and more convenient for all parties involved. Even in the U.S., a developed country where the credit industry has wide penetration, there is ample growth potential. The share of American consumers who don't use cash for any of their purchases stood at 41% in 2022, up from 24% in 2015. There is clearly still a ways to go and Mastercard stands to benefit.
Mastercard handled $2.4 trillion in payment volume in the second quarter. That figure was up 50% from five years ago. With estimates pointing to more than 6% annualized growth in credit card spending worldwide between now and 2029, it's a good bet to say that Mastercard will be handling meaningfully more volume toward the end of the decade.
While processing payment transactions will still be its biggest moneymaker, Mastercard is finding success in offering value-added services. Things like data analytics, fraud prevention, and cybersecurity solutions, which posted 18% sales growth last quarter (faster than the business overall), could contribute more to the company's financial performance in the future.
Investors should think about valuation
Mastercard arguably possesses one of the world's widest competitive moats. Its position is bolstered by powerful network effects. Billions of its cards are in use around the world, and those cards are accepted at more than 100 million merchant locations. This wide reach is incredibly valuable to all stakeholders.
Investors will also struggle to find more profitable companies than this one. In the past decade, Mastercard's operating margin has averaged a superb 55%. There aren't many businesses that exhibit this kind of financial prowess, which is directly attributed to its huge scale and high profitability. This results in tremendous free cash flow generation, which is used (in part) to pay dividends and buy back shares.
Mastercard shares don't look cheap at first glance. They trade at a P/E ratio of 36.6, which is more than rival Visa. But Mastercard's valuation is in line with its trailing 10-year average. Prospective investors might view this as being reasonable.
All other things being equal, a lower P/E ratio is a desirable attribute when one is considering stocks to buy, as it adds potential upside to an investment. But in this case, Mastercard is such a high-quality enterprise -- probably one of the best businesses in the world -- that investors who can de-prioritize valuation might find the stock a smart buy today.
Mastercard underperformed the S&P 500 in the last five years. I have no clue if this trend will continue between now and 2029. But what I do know is that adding this stock to your portfolio will bring peace of mind because you will know that you own a competitively advantaged, highly profitable business that has a durable growth runway ahead of it. If the valuation is a concern, perhaps dollar-cost averaging is the best approach to buy shares at various entry points.
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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 and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on 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.
