Mastercard is a Buy. Current price is 22.6% below intrinsic value.
Investing in a stock like Mastercard (MA) requires more than just glancing at its current price or market trends. To make informed decisions, savvy investors turn to valuation methods that estimate a company’s intrinsic value. In this post, we’ll explore Mastercard’s intrinsic value using two powerful approaches: the Buffett Valuation Method (inspired by Warren Buffett’s discounted cash flow model) and the McGrew Valuation Method, which adjusts growth rates for dynamic companies. By analyzing Mastercard’s financials, we’ll uncover whether its current price of $538.73 signals a buy, hold, or something else entirely. Let’s dive in!
Why Value Mastercard?
Mastercard, a global leader in payment processing, has been a darling of growth investors. With a robust business model, consistent free cash flow (FCF) growth, and a dominant position in the digital payments space, it’s no surprise that MA is a staple in many portfolios. However, at a share price of $538.73 (as of June 17, 2025), is Mastercard a bargain or overpriced? To answer this, we’ll use five years of financial data from Mastercard’s cash flow and balance sheet statements to calculate its intrinsic value per share, apply a margin of safety, and assess its valuation status.
The Valuation Methods Explained
Buffett Valuation Method
The Buffett Valuation Method is a classic discounted cash flow (DCF) approach, favored by Warren Buffett for its focus on a company’s ability to generate cash. Here’s how it works:
- Collect Free Cash Flow (FCF): Use historical FCF data to project future cash flows.
- Determine Growth Rate: If the 3-5 year FCF compound annual growth rate (CAGR) exceeds 10%, classify the stock as a growth stock and assume a 10% growth rate for 10 years. Otherwise, use 5% for stable firms.
- Project FCF: Forecast FCF for 10 years using the selected growth rate.
- Calculate Terminal Value: Estimate the value beyond Year 10 using a perpetual growth rate (2.5%) and discount rate (8%, based on a 4% Treasury yield plus a 4% premium).
- Discount Cash Flows: Sum the present values of all FCFs and the terminal value.
- Intrinsic Value per Share: Divide by shares outstanding.
- Margin of Safety: Apply a 25% discount to the intrinsic value for a conservative buy price.
McGrew Valuation Method
The McGrew Valuation Method refines the DCF model for growth stocks by incorporating a declining growth rate over time, reflecting real-world dynamics:
- Collect FCF: Use 3-5 years of FCF data, preferably five.
- Calculate CAGR: If the FCF CAGR is ≤10%, mirror the Buffett method. If >10%, classify as a growth stock and start with the CAGR in Year 1, declining linearly to 10% by Year 7, then holding at 10% for Years 7-10.
- Project and Discount FCF: Follow the same terminal value and discounting steps as Buffett’s method.
- Intrinsic Value and Margin of Safety: Calculate as above.
Both methods provide a disciplined framework to assess whether Mastercard’s stock price aligns with its underlying value.
Mastercard’s Financial Snapshot
Using Mastercard’s financial data from 2020 to 2024, we gathered the following:
- Free Cash Flow (FCF):
- 2020: $6,516,000,000
- 2021: $8,649,000,000
- 2022: $10,098,000,000
- 2023: $10,892,000,000
- 2024 (TTM ending Q1 2025): $14,315,000,000
- Shares Outstanding: 909,818,985 (as of Q1 2025)
- 5-Year FCF CAGR: Calculated as [(14,315,000,000 / 6,516,000,000)^(1/4) – 1] ≈ 21.7%
With a 5-Year FCF CAGR of 21.7% (>10%), Mastercard qualifies as a growth stock for both valuation methods. The current share price is $538.73, which we’ll use to determine the valuation status.
Buffett Valuation Results
For the Buffett method, we start with the 2024 FCF of $14,315,000,000 and assume a 10% growth rate for 10 years due to the high CAGR. The perpetual growth rate is 2.5%, and the discount rate is 8%. Projecting FCF for 10 years yields a Year 10 FCF of $37,129,423,316. The terminal value is calculated as:
Terminal Value = 37,129,423,316 × (1 + 0.025) ÷ (0.08 – 0.025) ≈ $691,957,434,520
Discounting all cash flows to present value gives a total intrinsic value of $468,321,976,586. Dividing by 909,818,985 shares results in an intrinsic value per share of $514.71. Applying a 25% margin of safety, the buy price is $386.03.
Comparing the current price ($538.73) to the intrinsic value (514.71), the stock is 4.7% above its intrinsic value, placing it in the Hold category (within 6% below to 35% above intrinsic value).
McGrew Valuation Results
The McGrew method leverages the 21.7% CAGR, starting growth at 21.7% in Year 1 and declining linearly to 10% by Year 7 (a 1.95% annual reduction). The growth schedule is:
- Year 1: 21.7%
- Year 2: 19.75%
- Year 3: 17.8%
- Year 4: 15.85%
- Year 5: 13.9%
- Year 6: 11.95%
- Years 7-10: 10%
Projecting FCF yields a Year 10 FCF of $53,141,973,203. The terminal value is:
Terminal Value = 53,141,973,203 × (1 + 0.025) ÷ (0.08 – 0.025) ≈ $990,373,136,960
Discounting all cash flows results in a total intrinsic value of $632,946,750,086, or an intrinsic value per share of $695.65. The 25% margin of safety gives a buy price of $521.74.
The current price ($538.73) is 22.6% below the intrinsic value (695.65), qualifying Mastercard as a Buy (7% to 25% below intrinsic value).
Valuation Summary
Here’s the detailed valuation table for Mastercard:
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| MA | Buffett Valuation | $514.71 | $386.03 | $538.73 | Hold |
| MA | McGrew Valuation | $695.65 | $521.74 | $538.73 | Buy |
What Does This Mean for Investors?
The Buffett Valuation suggests Mastercard is fairly valued, with its current price slightly above the intrinsic value, warranting a Hold. However, the McGrew Valuation, which accounts for Mastercard’s robust historical growth, paints a more optimistic picture, indicating a Buy opportunity at $538.73. The discrepancy arises because McGrew’s method captures Mastercard’s high growth trajectory (21.7% CAGR) more dynamically, projecting higher cash flows in the early years.
For conservative investors, the Buffett method’s lower intrinsic value and hold status may align with a cautious approach, especially given Mastercard’s premium valuation in a potentially volatile market. Growth-oriented investors, however, may lean toward the McGrew method’s buy signal, seeing room for upside as digital payments continue to expand globally.
Key Considerations and Limitations
- Data Sources: FCF and shares outstanding were sourced from Mastercard’s quarterly financials. The share price ($538.73) was assumed accurate but should be verified with Yahoo Finance or Google Finance for the latest trading day (June 17, 2025).
- Assumptions: The 8% discount rate and 2.5% perpetual growth rate are standard but may not fully reflect market conditions. The 21.7% CAGR assumes continued strong growth, which could be disrupted by economic slowdowns or competition.
- Limitations: Aggregating quarterly FCF for annual figures may introduce minor inaccuracies. The McGrew method’s linear growth decline simplifies real-world variability. Without real-time data access, the share price’s accuracy remains unverified.
Final Thoughts
Mastercard’s valuation hinges on your investment philosophy. The Buffett method urges patience, while the McGrew method highlights a potential buying opportunity. Given Mastercard’s strong fundamentals and growth in digital transactions, the McGrew valuation’s Buy signal may appeal to those betting on its long-term dominance. Always cross-check the current price and consider market conditions before acting.
What’s your take on Mastercard?
#Investing #StockMarket #Mastercard #ValueInvesting #DCF #Buffett #StockValuation #Finance #GrowthStocks