This Hedge Fund More Than Doubled Its Stake in MasterCard. Should You Buy?

According to hedge fund tracking site InsiderMonkey, the $7.5 billion hedge fund Tiger Global Management increased its holdings of MasterCard by 123% between the second and third quarter of this year.

That's a huge jump by any standard and brings the hedge fund's ownership to 7.6 million shares. What's the big deal with MasterCard, and should you follow suit?

What's the deal with MasterCard?Many casual market observers don't truly understand how MasterCard makes its money. Whenever you swipe your card, odds are that your card has either aVisaor MasterCard logo in the bottom corner.The confusion that results is understandable, considering this ubiquitous branding on debit and credit cards worldwide.

MasterCard and Visa are not actually credit card companies, though. They are both payment networks. They simply facilitate the complex digital interaction between your bank, the merchant, and the merchant's bank that makes your transaction possible. They are the action behind your transaction.

I have previously written a complete breakdown of how the payments system works, but put simply, the easiest way to think about MasterCard and Visa is as a toll collector. As your credit and debit card transactions move along the digital highways between banks and merchants, MasterCard and Visa sit along the route, collecting a small fee with every transaction. In this way, MasterCard's business prospers when more transactions and more dollars fly across its network.

And business is goodIn the third quarter of this year, net revenue grew 13%, net income grew 15%, and earnings per share grew 19%, all year over year. The dollar volume of transactions across MasterCard's network grew 12%, and the number of transactions processed bumped 10%.

The more you review MasterCard's financials, the more enamored with this company you become.Return on assets, for example, is 23.5% over the past 12 months and has averaged over 20% annualized for the past five years. The company's profit margin is a ridiculous 37%. Its dividend's five-year growth rate is a silly 41%!

The long-term upside is hugeAccording to MasterCard's internal research, 85% of the world's transactions are still handled with cash. The other 15%, the transactions that passed over digital payment networks, represented $8 trillion. That is a staggering level of running room for this company to grow.

The world is moving increasingly to digital payments, and it's very possible that the trend could accelerate in the very near future. Consider, for instance, how the burgeoning Chinese market hasbecome increasingly open to foreign payment companies such as MasterCard. Or that, at the same time, consumer behavior is increasingly shifting to mobile technologies to conduct commerce. Commerce conducted on mobile phones is commerce done digitally, and that's fantastic for MasterCard.

MasterCard has also boosted its dividend, a sign from management that the company is on strong footing.

The market currently values MasterCard at about 30 times earnings on a trailing-12-month basis. This value may at first seem steep, but it is justified by the company's mammoth upside and ridiculous financials.

Tiger Global Management recognizes the upside, and it's not alone. In fact, among the world's top 50 hedge funds, MasterCard is the most owned among any financial-services company.

The article This Hedge Fund More Than Doubled Its Stake in MasterCard. Should You Buy? originally appeared on Fool.com.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends and owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.