Should You Buy Mastercard While It's Below $530?

There aren't as many famous brands in the financial sector as in, say, consumer electronics. Finance tends to be a fairly straightforward without cool new products. There are exceptions, though, and payment card giant Mastercard (NYSE: MA) is one of the very few.

Mastercard's fame comes from its ubiquity as the No. 2 payment card brand (behind leader Visa) on the planet. Millions of Americans have at least one Mastercard credit or debit card in their possession, and this monster presence makes the company powerful and important. Yet its popularity has slipped a bit recently after its share price peaked just north of $530. Let's explore whether this relative weakness makes its stock a buy now.

Great growth and mighty margins

Although Mastercard (like Visa) is often referred to as a credit card company, that isn't entirely appropriate. Yes, its branding adorns many such instruments, so many people assume it is the entity also issuing the credit packed into them. Mastercard is not, in fact, the issuer -- outside entities, typically banks, are the ones providing the credit. Mastercard is responsible for processing the transactions, and shifting the funds where they need to go.

Since it doesn't have to trouble itself with evaluating and monitoring creditworthiness, Mastercard (and Visa too, while we're at it) can be a relatively lean operation managing those particulars. It takes a small slice of every purchase for this work.

That makes for a powerful and high-margin business, since there are a vast number of Mastercard transactions being made globally 24/7. Last year the company reaped more than $25 billion in revenue on these tiny slices; this gives you an idea of just how huge its business is these days.

That number is only set to grow, in both the immediate and long-range future. We're in the midst of a long-term consumer transition from cash purchases to those made by other means, most notably payment cards. The U.S. is far along with this transition, but in more traditional parts of the world it's taking more time. Regardless, when folks change their habits from physical currency to plastic, Mastercard is often the beneficiary.

This makes Mastercard -- and, again, Visa -- a mighty company in an enviable position, as an already high-margin business facing years of bottom-up growth from a social trend.

The company's performance bears this out. In the third quarter it collected $7.4 billion in net revenue, which was 13% higher on a year-over-year basis. Non-GAAP (adjusted and not compliant with generally accepted accounting principles) net profit increased even more, notching a 15% gain to $3.6 billion. It's worth noting that the resulting net margin was a very substantial 49%.

Mastercard's trajectory is more impressive if you zoom out a bit. On an annual basis, that top line has improved markedly and consistently since the start of this decade, rising from just over $15 billion in 2020 to more than $25 billion in 2023. Along the way net income almost doubled, rising to $11 billion-plus from $6.4 billion in 2020.

An excellent stock, although not a perfect one

There's a catch here. No company as prominent in its industry and posting such results will escape the market's notice, and even after the stock price sag Mastercard isn't a bargain on valuations.

The company's trailing price-to-earnings (P/E) ratio is nearly 40 and its forward P/E based on analyst profit estimates isn't much lower, at a shade under 32. Famous peers in the finance industry are cheaper; JPMorgan Chase's numbers are a respective 14 and 15, while the scores for ever-influential investment bank Goldman Sachs are similar, at 18 and 15.

Mastercard isn't impressive as a dividend stock either, with a comparatively measly yield of 0.5% on its current payout. It's almost guaranteed that if an investor closed his or her eyes and picked a dividend-paying stock at random, its yield would be substantially higher.

So Mastercard isn't a perfect stock and I can't say it's a howling bargain despite the sell-off. The company is, however, a major part of the global financial ecosystem and an essential part of its future. The world will continue to increasingly swipe and tap to buy things, and the card giant will be right there to reap substantial rewards.

That's the kind of powerful business that's worth paying a premium for, and forgoing a juicy dividend yield. Mastercard is absolutely a buy, in my mind, especially at this price.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, JPMorgan Chase, 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.