Is This Unstoppable Growth Stock a Buy Right Now? – The Motley Fool

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Rising interest rates have raised borrowing costs and resulted in reduced growth expectations for many growth stocks. This is why the market has crushed many tech-oriented growth stocks, with the Nasdaq Composite getting hammered 29% so far in 2022. 
One growth stock that has defied the steep downturn in broader markets is the payments processing company Mastercard (MA 0.71%). With the stock down just 8% year to date, this raises the following question: Is Mastercard a buy for growth investors? Let’s dive into the company’s fundamentals and valuation to answer this question. 
With tens of millions of acceptance locations in 210 countries and territories, Mastercard is accepted just about everywhere credit cards and debit cards are welcomed payment methods. After Visa‘s (V -0.09%) 4 billion-plus cards in circulation, Mastercard’s nearly 2.7 billion cards in circulation make it the second biggest publicly traded payments company in the global payments duopoly. 
Mastercard’s net revenue surged 15.5% higher year over year to $5.8 billion in the third quarter ended Sept. 30. What led to the mega-cap company’s robust top-line growth during the quarter?
Even amid the unfavorable environment of high inflation, consumer spending held up well for the quarter. This propelled Mastercard’s gross dollar volume, cross-border volume, and switched transactions higher. 
The company’s neutral currency gross dollar volume was $2.1 trillion in Q3, which was an 11% increase over the year-ago period. The mass rollout of COVID-19 vaccines and antiviral treatments over the last couple of years has resulted in the world largely reverting to pre-COVID travel policies. Because of border reopenings, Mastercard’s cross-border volume roared 44% higher year over year during the quarter.
Finally, the company’s switched transactions processed increased 8.9% over the year-ago period to 32.4 billion for the third quarter. And adjusting for Mastercard’s suspension of operations in Russia, switched transactions grew at a 19% clip in the quarter. 
The company posted $2.68 in non-GAAP (adjusted) diluted earnings per share (EPS) during Q3. For context, this was 13.1% higher year over year. Mastercard’s operating expenses grew at a faster rate (16.6%) than net revenue, which is why its non-GAAP net margin dipped 190 basis points over the year-ago period to 45.1%. The company’s decline in profitability was partially offset by a 2.2% decline in its weighted-average diluted share count to 968 million. This explains how Mastercard’s adjusted diluted EPS growth was a slower pace than net revenue growth. 
As the payment method of cash is further displaced by digital payment methods, Mastercard’s cards in circulation, transactions processed, and gross dollar volume will keep growing. This is why analysts are anticipating that the company’s adjusted diluted EPS will compound at 20.9% annually over the next five years. 
Image source: Getty Images.
With a 0.6% dividend yield, Mastercard probably wouldn’t be an income investor’s first pick. This is especially true considering that the S&P 500 index yields 1.6%. But for income investors willing to keep an open mind, it would be wise not to write off Mastercard so quickly. 
This is because the dividend payout ratio will likely be just 18.5% in 2022. Simply put, Mastercard will retain the vast majority of its earnings to invest in future growth, reduce debt, and complete share buybacks. The extremely low payout ratio should result in dividend growth in excess of earnings growth in the years to come. This could translate into 20%-plus annual dividend growth through the next several years, which would be amazing in my opinion. 
Mastercard is among the fastest-growing mega-cap stocks on the planet. And the valuation appears to be the cherry on top that makes the stock an intriguing buy for growth investors.
At the current $343 share price, Mastercard is trading at a trailing-12-month (TTM) price-to-free cash flow (P/FCF) ratio of 32.6. This is basically in line with the stock’s 10-year median TTM P/FCF ratio of 32. Since the fundamentals of the company and the overall industry are arguably as strong now as they have been in the last decade, this makes Mastercard an attractive growth stock.

Kody Kester has positions in Mastercard and Visa. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.
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