Mastercard(NYSE: MA) recently reported its 2024 first-quarter results. Revenue and diluted earnings per share (EPS) came in ahead of Wall Street estimates, but because the market is a forward-looking machine, investors were probably disappointed that executives slightly lowered their sales guidance for the full year.
Nonetheless, this financial stock has been a big winner for shareholders in the past decade, rising almost 500% during that time. Given that shares sit about 9% off their peak, you might have the company on your watch list right now. But before adding Mastercard to your portfolio, here are three facts you should know.
A toll-road business model
It's easy to get confused by how the financial services sector and payments industry operate, but it's critical to know that Mastercard doesn't lend any money despite being seen as a credit card company. The company just provides the communications channel for merchants and banks to talk with each other.
This results in a very attractive business model that has allowed Mastercard to produce an impressive operating margin that has averaged 56% in the past five years. Because it doesn't extend credit, the financial risk is greatly reduced.
A good way to view Mastercard, as well as its larger industry peer Visa, is essentially as a toll-road operator for the global economy. Anytime money moves around between consumers and merchants, for example, Mastercard sits in the middle, collecting lucrative fees in the process.
Powerful competitive position
There are currently 3.4 billion Mastercard cards in use around the world, as well as 130 million merchant locations that accept them as a form of payment. This sprawling setup points to how wide-reaching the company's operations are, with a presence in 210 countries and territories.
As a two-sided platform, Mastercard benefits from powerful network effects. Its service is incredibly valuable to consumers because the cards are usable virtually everywhere. And merchants who accept these cards have a broad customer base. That wide economic moat makes its competitive position virtually unassailable.
Of course, there are still some risks to keep in mind, no matter how robust Mastercard's competitive standing is. The bears will point to the rise of new payment methodologies. But even with the popularity of Bitcoin, PayPal, and Block, for example, Mastercard has continued to post stellar financial results.
Additionally, given the dominance of Mastercard over the card market, it's not a shock that regulators love to pick on the business. There will always be legal battles the company has to deal with, which usually relate to the fees that merchants pay. So far, Mastercard's fundamentals remain in tip-top shape, but investors need to pay attention to any new developments.
Impressive financial performance
There's really one key reason why Mastercard shares have rewarded investors over the long term: the company's strong financial performance.
In the latest quarter (Q1 2024 ended March 31), Mastercard reported revenue and diluted EPS growth of 10% and 30%, respectively. These impressive results aren't anything new, as the business has proven its ability to consistently post healthy top- and bottom-line gains.
It helps that Mastercard is riding the broad secular shift from cash and paper-based transaction methods to digital forms of payment. While the biggest opportunity for growth lies in emerging markets in Africa, Latin America, and parts of Asia, there is still a sizable runway in the U.S. as well.
In addition to its financial performance, knowing about Mastercard's business model and its key competitive strengths should give investors a basic understanding before they buy shares.
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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 Bitcoin, Block, Mastercard, PayPal, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, short January 2025 $380 calls on Mastercard, and short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
