In a pose a yoga master would envy, a contortion that would kick any mere mortal’s ass in a game of Twister, I am long Mastercard (MA) and short Amazon (AMZN). What’s more, if they do the opposite of what I think in the short term, I will just double down.
Before you begin calling for the straight jackets and the sedatives, let me remind you that it’s not a weekend where I can sleep off this type of horseplay (besides, everyone knows I am strictly OTC with good Cabernet). Seriously, hear me out.
OK… Mastercard is driven by retail and so it Amazon. So they should move nearly in lock step right? Sort of. They did for the last year. But a major divergence is coming.
Why long Mastercard? In the wake of the bad numbers from American Express (AXP) a couple weeks ago, Mastercard sold off 11% in sympathy. The reason: AmEx cited increasing deliquencies, which does not impact Mastercard, but also cited decreased card usage. The alleged experts divined that this would affect Mastercard, whose model is obtaining a percentage of every transaction charged to a card that carries its logo. Less card usage means less revenue for Mastercard, right?
But wait. There are two substantial differences between AmEx and Mastercard. First, despite a lot of diversification into revolving credit cards (cards you can pay off over time), a good number of AmEx cards are still demand cards (cards you pay off in full when you get the statement). When households become concerned about their “finances,” what they are really concerned about is cash flow… having enough money to pay the bills that must be paid in full each month (like electricity and mortgage and car) and enough left over to at least manage the debt on their credit cards (pay the minimum payment or a little more). During times like this, consumers who normally charge on a demand card like AmEx (usually to collect the rewards points) will switch to a revolving charge card so that they can better manage their cash flow.
Another difference that is even more important: Mastercard has a huge presence in debit cards. And just because people stop using their Mastercard or AmEx credit card will not stop them using their debit cards. To be sure, more than 80% of gasoline purchases are done at the pump using a credit or debit card. And Mastercard gets a piece of each transaction. If you believe in the long term that gasoline prices will increase, then you can feel comfortable buying into Mastercard’s model.
Amazon, like Mastercard, plays heavily in the retail space. And last year, while the consumer was humming along, both stocks ran up drastically. But the similarities end there. Amazon had strong sales last year, but the sales were centered heavily on one-time events (e.g., the release of the last Harry Potter book). The vast majority of these customers will never be long-term profitable. And there is no such revenue-driving event coming this year.
All good reasons to be suspect. But the reality check for me came when I saw that Amazon’s P/E was an unbelievable 95. By contrast, Google (GOOG) – the standard bearer for making money on the net – trades at a significantly more modest P/E of 50. Amazon is priced for perfection. And when they fail to attain it, the stock will get crushed.
Disclosure: As of publication, I am long MA and short AMZN, though positions are subject to change at any moment.