In the ever-evolving landscape of investments, some companies stand out as beacons of success. Mastercard, the global payment giant, is one such example.
Over the past decade, Mastercard’s shares have experienced an astounding surge, outperforming major indices and delivering impressive returns to investors. If you had invested $10,000 in Mastercard in 2013, that investment would now be worth nearly $59,000.
Riding the Cashless Wave
Mastercard operates as a communication network connecting consumers, merchants, and banks, facilitating secure debit and credit card transactions. The company’s success is closely linked to the global shift towards cashless transactions. While physical cash transactions do not generate revenue for Mastercard, the rise of digital payments has been a driving force behind its growth.
Between 2012 and 2022, Mastercard’s revenue exhibited remarkable consistency, with a compound annual growth rate of 11.6%. Aside from a 9.4% sales dip in 2020 due to the pandemic, the company achieved double-digit revenue growth in every other year. This steadfast growth signifies its sustainability and resilience in a dynamic market.
The Digital Age Advantage
Mastercard’s success story is intertwined with the proliferation of the internet and smartphones. The rise of e-commerce and the necessity for digital payment methods in buyer-seller interactions have boosted the company’s fortunes. Services like Apple Pay and various digital wallets have further contributed to the utilization of the Mastercard network.
However, the company’s stock performance can be attributed to more than just top-line growth. Mastercard’s ability to exert operating leverage has been a critical factor. In 2012, diluted earnings per share (EPS) were $2.19. By 2022, this figure had soared to $10.22, reflecting a compound annual growth rate of 16.7%. With Mastercard taking a small fee on each transaction, greater transaction volumes have led to faster profit growth. Its capital-light and highly scalable business model, combined with minimal marginal costs per transaction, have culminated in an impressive operating margin approaching 60%.
The Investment Dilemma
While Mastercard’s financial results underscore its momentum, prospective investors face a challenging decision. Revenue and diluted EPS surged by 14% and 28%, respectively, in the latest quarter, largely driven by strong cross-border volume. Even amid economic uncertainties, consumer spending has remained robust.
Looking ahead, Wall Street remains optimistic, projecting double-digit annualized growth rates for both revenue and EPS over the next five years. However, the stock’s valuation is a concern. Shares are currently trading at a trailing price-to-earnings (P/E) ratio of nearly 38, which many would consider expensive. Investors seeking quality over P/E multiples might opt to establish a small position in Mastercard.
Balancing Opportunity and Caution
Mastercard’s decade-long ascent is a testament to the company’s ability to harness the power of digital payments and cashless transactions. While past performance doesn’t guarantee future success, the financial giant’s track record and growth potential have certainly caught the attention of investors.
However, with an elevated P/E ratio, cautious investors may want to weigh the potential benefits against the valuation before jumping on board the Mastercard investment train. In a world where change is constant, Mastercard’s journey remains one of remarkable resilience and adaptability.
