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Mastercard: Buy, Sell, or Hold?

Motley Fool - Wed Apr 10, 6:55AM CDT

Mastercard(NYSE: MA) is known as a powerful card payments enterprise that's second to Visa in size. Its services are available in 210 countries and territories, demonstrating its wide reach.

This unstoppable financial stock has crushed it for shareholders, producing a total return of 612% during the past decade. That means a $1,000 investment in April 2014 would be worth an impressive $7,120 today. That's way more than the S&P 500 gained.

Let's look at the arguments from why Mastercard is a buy, sell, or hold right now.

Reasons to buy

There is no shortage of reasons to buy this business. I can identify three major factors investors can appreciate.

First, Mastercard is riding the secular tailwind of the rise of cashless transactions. Consumers and merchants value the safety and convenience of this type of payment methodology. And there is a sizable growth runway. Less-developed regions, like Africa, Latin America, and certain parts of Asia, have a much longer way to go when it comes to lowering cash usage. But even in the U.S., card payments should still register solid gains.

The second reason this stock is a compelling buy has to do with Mastercard's economic moat. The company benefits from powerful two-sided network effects. There are 2.9 billion Mastercard cards in circulation accepted at more than 100 million merchant locations. More cards and more merchants immediately make the network more valuable to all stakeholders. This protects Mastercard from the threat of disruption.

Another reason to buy the shares has to do with Mastercard's pristine financials. In the past five years, the business has reported an average operating margin of 56%. This results in tremendous free cash flow generation.

Reasons to hold

To be clear, all the reasons for why this stock is a smart buy also apply to why Mastercard should be held. But there's another factor to keep in mind.

It might be tempting to take some profits off the table after the winning performance of the shares. However, longtime investors probably know more about this business than any potential new ideas that they are looking at. That makes holding on to your winners easier to do, giving you more peace of mind.

If you think Mastercard can continue generating solid returns, then it makes sense to stay put.

Reasons to sell

On the bearish end of the spectrum, I believe there are two reasons shareholders might consider getting rid of their Mastercard holdings.

The first reason is the stock's valuation. After their impressive rise, the shares trade at a price-to-earnings ratio of almost 40. This is slightly cheaper than the trailing-five-year average. But it represents a premium to rival Visa, as well as the overall S&P 500.

Despite all the company's favorable attributes mentioned, this valuation might be a dealbreaker for some. And it might be an easy decision to sell the stock.

Mastercard will also continue to face regulatory risk. Because of its dominance in the industry, lawmakers will always try to challenge the company's influence. This has resulted in legal battles and fines in the past. And this is likely to continue in the future.

To its credit, Mastercard has been able to successfully navigate any roadblocks that have come up in the past, but the uncertainty might make some investors uncomfortable.

There are valid arguments for all the angles. Investors will need to think about what factors they agree with most before deciding what to do about this 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 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.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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