What constitutes a blue chip stock is subject to some debate, but the term generally refers to large businesses that reliably create wealth for shareholders. Most blue chip stocks have a wide market presence and a well-known brand, and many pay a dividend that consistently climbs over time.
Microsoft (MSFT -0.14%) and Mastercard (MA 0.87%) meet most of those criteria, and both stocks could soar when economic conditions improve and the next bull market begins. Here's why.
1. Microsoft
Microsoft is the IT backbone of many companies around the world. Its office productivity suite (Microsoft 365) is the most popular enterprise software product in any category. But the company also has a strong presence in communications, enterprise resource planning, robotic process automation, and cybersecurity software, and all four markets are expected to grow at a double-digit pace through the end of the decade.
Meanwhile, Microsoft Azure is the second-largest provider of cloud infrastructure and platform services, and its market share is up substantially over the last five years. That success stems from strength in multiple cloud verticals, especially developer tools, database systems, and artificial intelligence (AI) infrastructure. Indeed, its AI infrastructure helped the company land an exclusive partnership with OpenAI, creator of the viral application ChatGPT. All of that is noteworthy because cloud computing spending is expected to grow at 14.1% annually through 2030.
Finally, Microsoft has quietly become the seventh-largest digital advertiser in the world. Its exclusive partnership with Netflix gives the company a foothold in connected TV advertising, the fastest-growing ad format in the U.S. But Microsoft also has a foothold in search, display, and business-to-business advertising because of its Bing search engine, Edge browser, and LinkedIn social platform. That puts Microsoft in a good spot because ad tech spend is expected to grow at 13.7% annually through 2030.
In spite of economic headwinds, Microsoft delivered reasonable financial results in the third quarter of fiscal 2023 (ended March 31). Revenue increased 7% to $52.9 billion and earnings rose 10% to $2.45 per diluted share. But investors have good reason to believe growth will accelerate when economic conditions improve and the next bull market begins.
As discussed, Microsoft has a strong position in several categories of business software, cloud services, and digital advertising, and all of those markets are forecast to grow at a double-digit pace through 2030. Microsoft should be able to match that pace at a minimum, so investors can expect double-digit revenue growth through 2030. That makes its current valuation multiple of 12 times sales seem reasonable. At that price, investors should feel confident in buying a small position in this blue-chip stock.
2. Mastercard
Mastercard operates one of the largest payment networks in the world. Its platform connects card issuers and merchant acquirers by switching payment transactions. In other words, Mastercard facilitates the authorization, exchange of data, and movement of money needed to complete credit and debit card transactions. But its network also supports account-based transactions like business-to-business payments and consumer bill payments. Finally, Mastercard offers value-added services for cybersecurity, fraud management, and open banking.
Investors should think of Mastercard as a tollbooth because it charges clients for access to its financial infrastructure. Specifically, the company takes a percentage of gross dollar volume (GDV) on domestic and cross-border payments, and it collects a fee for switching transactions and providing value-added services. Investors should be clear on one concept: While fintech companies like PayPal and Block have been successful, Mastercard can still earn fees when digital/mobile wallets are used at checkout (if the transactions are funded by a Mastercard). In other words, platforms like Venmo and Cash App are built on top of the Mastercard network, not in lieu of it.
Despite ongoing economic headwinds, Mastercard delivered a solid financial performance in the first quarter. GDV rose 10%, switched transactions increased 12%, and cross-border volume climbed 29%. In turn, revenue rose 11% to $5.7 billion and cash from operations jumped 8% to $1.9 billion. More importantly, investors have good reason to believe Mastercard will maintain that momentum in the future, especially as economic conditions improve. High inflation has suppressed spending, and unfavorable exchange rates have blunted growth. But those obstacles will diminish in time, ushering in a new bull market that could carry Mastercard stock much higher.
To contextualize the opportunity, Mastercard's reported GDV of $8.2 trillion last year accounts for just 7% of its $115 trillion addressable market. But the company has a stiff tailwind at its back. Businesses and consumers around the world are abandoning paper payments in favor of credit and debit cards, digital wallets, and other means of transacting electronically. Indeed, Grand View Research forecasts that digital payment revenue will increase by 21% annually through the end of the decade.
On that note, shares of Mastercard currently trade at 16.1 times sales, a slight discount to its five-year average of 18.1 times sales. Investors should use that opportunity to buy a small position in this growth stock.
Trevor Jennewine has positions in Block, Mastercard, and PayPal. The Motley Fool has positions in and recommends Block, Mastercard, Microsoft, Netflix, and PayPal. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, short January 2025 $380 calls on Mastercard, and short June 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.
