From Tom Dyson, publisher, Palm Beach Research Group: Today, I made a bet with Mega Trends Investing Editor Teeka Tiwari.
We’re betting on financial services company Visa Inc. (NYSE: V). I bet Visa will generate negative returns for investors over the next three years, including dividends.
Teeka took the other side of this bet.
Visa is an incredible company. It processes payments—about 65 billion of them in 2014—from 2.3 billion credit cards… at 36 million merchant acceptance points.
Visa is the dominant market leader in its space. It accounts for about half of all credit card transactions and about three-fourths of all debit card transactions worldwide.
Visa earns a small fee on every single transaction made through its network.
In a world where the number of digital payments is always rising, Visa’s business will keep growing.
In 2014, Visa’s:
- Transactions increased to 65 billion (up from 54 billion in 2012).
- Payments increased to $7.3 trillion (up from $6.3 trillion in 2012).
- Revenue hit $12.7 billion (up from $10.4 billion in 2012).
It’s almost impossible to compete with Visa because of its brand name, its global network, and its ability to deal with regulators all over the world.
So, why on earth would I bet Teeka this amazing company will generate poor shareholder returns over the next three years?
(Please note: This isn’t a high-confidence bet for me. I’m not putting a cent of my own money into this idea. I’m definitely not recommending you make this trade. Teeka and I are wagering a steak at a local restaurant…)
Visa won’t generate good returns for shareholders because the stock is overvalued.
Yes, it’s a great company. Yes, it’s extremely profitable. Yes, it has a market position that’s unassailable over the next three years.
But its stock is just too expensive.
It’s crazy how expensive the stock is. It has a price-to-sales (P/S) ratio of 13.8. The average P/S ratio of the S&P 500 is just 1.8.
I screened all stocks on the planet with market caps larger than $10 billion. I ranked them by P/S ratio. Visa ranks No. 36.
It’s more expensive than Yahoo, Tesla, Twitter, and LinkedIn.
Visa also has a price-to-earnings (P/E) ratio of 32. The average S&P 500 company trades at around 19 times earnings.
You can’t improve on perfect
My conclusion: The market’s pricing Visa’s stock as if it were a perfect company.
(Not just a good company… but the perfect company.)
The problem is, you can’t improve on perfect.
Even if Visa continues to amaze investors, it won’t make the stock go up much. That’s because investors already expect to be amazed.
But what if investors become disappointed, for some reason? The stock will have an easy time falling… And I’ll win the bet.
For example, in April, Visa said its revenue would grow by 10% or 11% this year. But when Visa released its latest quarterly report in July, the company lowered those projections to 9% or 10%.
This lower forecast caused Visa’s stock to instantly drop 5%.
What if a surprising new law or regulation creates higher costs for credit card transactions?
Over the next five years, we’re going to see a big shift from cards to electronic payments. In 10 years, credit cards probably won’t exist anymore.
On one hand, this is an opportunity for Visa: As it becomes easier to pay for things, transaction volume will grow.
But it’s also a threat… There will be new technologies, new competitors, new rules, and lots of uncertainty as we move away from credit cards.
What if Apple Pay—or another new payment mechanism—disrupts Visa’s business model? (Apple Pay and Visa are already partnering, so I’m not suggesting Visa’s going to disappear, just that Apple Pay might cause issues.)
Or what if another “cryptocurrency,” like bitcoin, takes off?
No one knows what the future holds for Visa.
I just don’t like betting on perfection… Because when you do, it’s very easy to be disappointed.
And that’s why I made this bet with Teeka…
Reeves’ Note: Tom’s Visa bet rests on his firm belief in a rising dollar. Most investors are terrified the Federal Reserve’s printing press will erode the value of their dollars. They’ve scrambled to push money into every corner of the investment universe… launching valuations skyward. It’s unsustainable. Tom’s taking the contrarian side of this macroeconomic “bet.”
Most people have no idea of the danger this poses to their investments today. So, Tom shot a vital two-minute video update on his cellphone. You can watch it below. Be sure not to miss what he says is “the most important update of [his] 10-year career.”