Mastercard Is One of the Largest Financial Companies by Market Cap. But Is It a Buy?

With a market cap of nearly $500 billion, Mastercard (NYSE: MA) is a true corporate giant. Indeed, it ranks as the 16th-largest American company by market cap, ahead of other financial behemoths like Bank of America, Wells Fargo, American Express, and Morgan Stanley.

But why? And perhaps more importantly, will Mastercard retain its place in the years to come? Let's find out.

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Image source: Getty Images.

Mastercard's greatest asset is its business model

Like its chief rival Visa, Mastercard has a business model based on payment processing. The company operates a vast network that facilitates payment transactions between merchants, cardholders, and card-issuing institutions.

In other words, Mastercard is the classic middleman. It charges fees for the use of its network. And while -- broadly speaking -- each individual fee is tiny, they really add up.

Over the last 12 months, Mastercard generated $29 billion in revenue. That's up about 12% from a year earlier when the company generated $26 billion in revenue. The increase is thanks to growing global payment volumes as the world steadily moves closer to a cashless society. In particular, emerging market economies continue to transition away from cash and toward cards as living standards increase and internet access expands.

Moreover, Mastercard's network benefits from economies of scale. That is, as the network grows in size, Mastercard can derive more and more profit from it, as the benefits of the network grow faster than its costs.

Indeed, over the last 10 years, Mastercard's operating margin has increased from 53% to 58%, while its net income has soared from $3.7 billion to more than $13.1 billion.

MA Operating Margin (TTM) data by YCharts

How and why Mastercard's stock has thrived

After reviewing its business model, it's no wonder that Mastercard stock has advanced by leaps and bounds. In fact, Mastercard has been one of the best stocks to own over the last 10 years, with a 10-year total return of 518%, easily outpacing the S&P 500's total return of 246% over the same period.

Supporting this excellent performance is Mastercard's solid mix of dividend payments and share buybacks. The company currently pays a modest quarterly dividend of $0.76 per share, generating a dividend yield of 0.55%. Mastercard also announced a $12 billion share repurchase plan in December of 2024, which will help drive shareholder value by reducing outstanding shares.

Mastercard can support these initiatives thanks to its strong free cash flow. Over the last 12 months, the company generated $14.3 billion in free cash flow, or $15.53 per share.

Is Mastercard stock a buy now?

Granted, there are risks to owning Mastercard stock.

For one, the company is subject to massive regulatory risks. Mastercard is subject to several ongoing lawsuits related to antitrust and consumer protection issues. As with any such litigation, legal fees, settlements, or monetary fines could take a bite out of its future profits.

In addition, competitive disruptions like crypto or emerging fintech companies could take market share from Mastercard going forward. Finally, there is the general risk of an economic downturn that would see global payment volumes slow.

However, while each of these risks is to be taken seriously, Mastercard's core business model is simply too good to ignore. Investors would be wise to buy and hold shares of Mastercard if they don't already own them.

Should you invest $1,000 in Mastercard right now?

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American Express is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Jake Lerch has positions in Visa. The Motley Fool has positions in and recommends Bank of America, Mastercard, and Visa. The Motley Fool has a disclosure policy.