An extraordinary profitability in the long term, which is what the shares of MasterCard (MA) have obtained. In the last decade, the payments industry giant’s stock gained more than 1,080%, far surpassing the 176% cumulative return produced by the S & P 500 index in the same period.
The attractive return of Mastercard’s shares has been supported by the company’s financial performance. In 2008, Mastercard generated sales of 4.99 billion dollars and a free cash flow of 240 million dollars. A decade later, the company’s revenue amounts to 13.96 billion and free cash flow to 5.53 billion dollars based on data from the last 12 months.
The company reported both sales and profits above market expectations in the last quarter. The sales amounted to 3.58 billion dollars, a growth rate of 31.3% year-on-year. The number of transactions processed increased by 17%, and the volume of international transactions grew by 21% compared to the same quarter in the previous year. The company’s earnings per share were $1.5 per unit in the period, exceeding analysts’ forecasts by 0.25 per share. Mastercard generates truly exceptional profitability levels, the operating profit margin is in the area of 40% on sales.
MasterCard brand power is a key strategic advantage in an industry in which the recognition and confidence of consumers are determining factors. Additionally, the company benefits from the network effect. It is known by this name the process by which the value of a service increases as the number of users grows.
The telephone and social networks are traditional examples of the network effect. Having a telephone line has little value when the number of users of those telephone lines is low. On the other hand, the value of the service increases as the number of users grows and it is possible to communicate with a greater number of people via the telephone line. The same principle comes into play in the social networking market, since the value of the service offered by these companies grows as the number of users in these networks increases.
Something similar happens in the payment systems market. Companies and businesses need to accept the cards that can bring them a greater number of potential customers, while consumers want to have the cards that are accepted in the largest number of companies. Therefore, consumers and businesses attract each other to the main payment platforms.
This means that to the extent that Mastercard gains new users, it not only generates sales and increasing profits, but also increases the value of the service and consolidates its market position from a strategic point of view. This virtuous circle generated by the net effect has clearly been beneficial to MasterCard investors over the years.