It's not surprising that fintech company Mastercard (MA) has earned a spot in the equity portfolio of famous investor and philanthropist Warren Buffett's holding company, Berkshire Hathaway (BRK.B). Currently, MA holds a 0.5% weight in the legendary Berkshire portfolio.
Founded in 1966, Mastercard has made a name for itself in the global payments industry, serving over 210 countries and territories. Mastercard has seen rapid growth in recent years, owing to the growing global adoption of digital payments. There are numerous strong players in the fintech industry, including Visa (V), Block (SQ), and PayPal (PYPL). Nonetheless, Mastercard has been proactive in expanding its digital offerings and partnerships, thereby strengthening its market position.
Over the past 10 years, this fintech stock has been a winner, returning over 501%.
Currently valued at $427 billion, Mastercard's stock has gained 7.6% this year, trailing the S&P 500 Index’s ($SPX) gain of 11.6%. Let's look at why Mastercard is an attractive stock to buy right now.
Sturdy Financial Health
Mastercard's financial health remains strong, with consistent revenue growth and profitability. In the most recent first quarter, net revenue increased by 10% to $6.3 billion, due to growth in Mastercard's payment network and value-added services and solutions (its two reportable segments). The company has issued 3.4 billion Mastercard and Maestro-branded cards worldwide.
Despite the geopolitical tensions, global travel demand is on the rise, which led to healthy consumer spending and cross-border volume growth by 18%, thereby boosting the payment network’s revenue in the quarter. Furthermore, the company's consulting and marketing services, loyalty solutions, and fraud and security capabilities increased in the value-added products and solutions segment. Adjusted earnings per share (EPS) also jumped 18% to $3.31. Both revenue and earnings surpassed consensus expectations.
Michael Miebach, CEO of Mastercard, stated, “We are driving growth in electronic payments by scaling innovative technologies like tokenization. That’s why people choose Mastercard - for a simple, seamless, and secure way to pay.”
Furthermore, Mastercard pays a dividend yield of 0.57%, which is lower than the financial sector average of 3.18%. However, its forward payout ratio of 15.9% suggests that current earnings can cover dividend payments while leaving room for growth.
In the first quarter, the company repurchased 4.4 million shares and paid $616 million in dividends. Mastercard's strong balance sheet, which includes significant cash reserves, enables the company to invest in future growth opportunities while weathering potential economic downturns. It had $9.18 billion in cash and cash equivalents at the end of the quarter.
Bright Prospects Ahead
Mastercard's growth strategy hinges on innovation and strategic acquisitions. The company has made significant investments in technology to improve its payment solutions and expand its ecosystem.
The company introduced tokens as a means of digital payments, and that initiative showed 50% year-over-year growth in Q1. Management believes there is plenty of room for expansion, as just "one in four transactions on the Mastercard network are tokenized today." Looking ahead, the company intends to make rent payments available through the Mastercard network.
Mastercard is also using generative AI solutions to improve its products and services and provide more value to its customers. The company's real-time fraud solution, Decision Intelligence, now has an advanced next-generation version, Decision Intelligence Pro, which is expected to "improve the overall score and boost fraud detection rates on average by 20%."
In the Q1 earnings call, the CEO emphasized that the tailwinds and headwinds for economic growth appear to be balanced, implying a positive growth outlook.
Mastercard is well-positioned to reap the rewards of the evolving digital payment market. Looking ahead to 2024, management expects revenue to grow at the high end of a low double-digit range.
Analysts remain optimistic about Mastercard's long-term prospects, with many predicting double-digit revenue growth and strong stock performance. Precisely, analysts forecast revenue and earnings to increase by 10.9% and 16.4%, respectively, in 2024. In fiscal 2025, revenue and earnings are further expected to increase by 12.5% and 16.3%, respectively,
Currently, Microsoft stock trades at 32 times forward estimated 2024 earnings, compared to its five-year historical average of 40.
What Does Wall Street Say About Mastercard Stock?
Following the company’s Q1 results, Tigress Financial analyst Ivan Feinseth reiterated a "buy" rating on the stock, with a high target price of $550, implying a potential 19.8% gain over the next 12 months.
Feinseth's positive outlook for the stock is based on Mastercard's strong financial health, commitment to returning value to shareholders, and ability to attract new customers across all regions. Likewise, Barclays maintained the same stance, setting a price target of $530 for the stock.
Furthermore, DZ Bank analyst Timo Dums raised MA stock's target price to $550 and assigned a "buy" rating.
Overall, on Wall Street, Mastercard is a "strong buy.” Out of the 33 analysts that cover the stock, 29 have given it a “strong buy” rating, while three have a “moderate buy” rating and one analyst recommends a “hold.” The analysts' mean target price for Mastercard stock is $497.07, which is 8.3% above current levels.
The Bottom Line on Mastercard
Mastercard's prospects appear to be extremely promising with the ongoing digital payments revolution and the expansion in emerging markets. Given low levels of financial inclusion and a shift toward digital banking in these regions, the company's penetration into emerging markets has significant growth potential. Mastercard, at under $500 per share, makes a compelling case for a top growth stock to buy and hold for the long term.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
