I was thinking about MasterCard (MA) and Visa (V) the other day. I remember back in 2006 when MasterCard went public. It was kind of an interesting idea at the time -- it was mutually owned by a consortium of banks and it was going to sell shares to the public and convert to a for-profit enterprise.
It wasn't an obvious trade. There was a lot of litigation risk, if I remember correctly, but the smart guys kept pointing out the same things to me over and over:
- Credit card networks have huge barriers to entry;
- Profit margins are huge;
- You do the math.
What happened? MasterCard goes public first, and people can't get enough of it. It also has the unique quality of being a financial stock without being a bank and having credit risk. The bull case got even better. People used less cash and more cards, and MasterCard and Visa (which went public soon afterwards) take a small slice of nearly every credit card transaction in the U.S. and internationally.
A lot of people have complained about the fees. But the complaints tend to go nowhere, because at the end of the day, the money that merchants pay in fees is far less than the cost incurred by handling cash (and the inevitable pilferage). And it's faster and easier, encouraging people to buy more. Everybody wins.
What about MasterCard and Visa today? Well, the stocks have done nothing but go up -- for eight straight years -- probably the biggest and longest winning streak of any large-cap name. The bull case is still there. Big barriers to entry. Huge profit margins. Although the thing about huge profit margins and capitalism is that over time, someone will figure out how to build a better mousetrap, and the big margins go away.
Typically, you can identify these buggy whip businesses years before obsolescence. Cable, for instance, probably won't be around in 10 years. So the risk with the credit card payment networks is that Apple or Amazon builds that mousetrap. The answer might even come from Silicon Valley.
So that day of obsolescence is not imminent, but these are very expensive stocks with only an average story.
Furthermore, they are growth names and they have been hurt badly by the downturn in growth and tech and momentum. The uptrends have been broken, and it's unlikely that they will resume. The only question is how severe the correction will be.
It is also worth pointing out that financials have been acting poorly, and MA and V are exactly the kind of stock I want to be short: growth and financials.
These stocks still do have a decent story -- there is plenty of room to grow in out of the way places like frontier markets, and the moat is still there. But I am betting on severe valuation compression as the growth factor remains under pressure. I plan on shorting MasterCard in the next 24 hours.