Visa has been a wonder to behold almost since it went public at $17.25 in March 2008. True, the following twelve months surely must have scared many shareholders, but the ones who stayed have been generously rewarded. Since the bottom in 2009, Visa stock is up over 2000% and that is without counting the dividends. An astonishing return.
And indeed, Visa is a company of the highest quality. Its duopoly with Mastercard allow the two firms to post top-notch financial results every year. Their sales and earnings have risen substantially since the financial crisis more than a decade ago.
But when a company has been doing so good for so long investors often stop paying attention to one crucial thing: valuation. The stock trades at a forward P/E ratio of 40. This could be justified if the company’s profits were increasing at a 40% clip annually. But in reality, Visa ‘s sales and earnings have barely budged over the past three years. Despite the e-commerce boom, there was actually a modest drop in 2020.
History tells us that sooner or later the stock price reflects a company’s fair value. Undervalued companies go up and overvalued companies go down. Elliott Wave analysis tells us this might happen to Visa sooner than most think. Take a look.
The weekly logarithmic chart above reveals a complete impulse in Visa stock. The pattern started from $10.45 in January 2009 and is labeled (1)-(2)-(3)-(4)-(5). Wave (3) is extremely extended, while last year’s coronavirus selloff fits in the position of wave (4).
Valuation and Elliott Wave Analysis Point in the Same Direction for Visa
If this count is correct, the recovery we have been witnessing since the March 2020 bottom must be wave (5). And for the bulls, that is the problem. According to the theory, we can expect a three-wave retracement after every impulse. Since corrections usually erase the entire fifth wave, this means Visa stock can fall back to the support area near $130. Maybe even lower.
The negative outlook is reinforced by the RSI indicator, which depicts a double bearish divergence between waves (3) and (5). Now, let’s take a closer look at Visa ‘s rally over the past twelve months.
Ending diagonals only occur in the position of wave C of a correction or wave (5) of an impulse. The structure of Visa ‘s surge from last year’s low looks strikingly similar to an ending diagonal pattern. It has five waves labeled 1-2-3-4-5, its shape is contracting and waves 1 and 4 are overlapping. Besides, waves 1 and 3 clearly consist of just three sub-waves.
A stretched valuation paired with a bearish Elliott Wave pattern is the closest thing to a “stay away” sign in the markets. Visa has both. If the above analysis is correct, a 40+% decline can be expected.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!