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“Forget Bitcoin!” What’s Wall Street Daily’s “private currency sweeping America?”

Explaining True Alpha's "How to (Legally) 'Mine' America's Top Rewards Programs for Cash"

Lots of folks are asking about this one, so we’re pulling it to the top of the page again — the article below has not been updated or revised since it ran on March 10, though in the interim the stock teased bumped from $10 to $13 and is now back down below $12, with solid recent earnings… it now trades for about 19X 2016 estimated earnings and growth expectations remain about the same as they were in March.

—from 3/10/15—

It’s now been quite a while since the Bitcoin mania peaked, but there’s still a lot of curiosity around that virtual currency — particularly because of the “millionaire” stories that circulated when it was in its ridiculous runup in dollar value a couple years ago… so I guess it’s natural that the idea of the “next bitcoin” still has some traction.

This time, however, it’s not about one of the other “next bitcoin” cryptocurrencies — but about something that they folks at True Alpha are calling an “alternative currency” that’s already in use in households around the country: reward points.

This reward points story has been circulating for a while now, and our readers had some good discussion of it and proposed solutions (mostly correct ones) when it first started getting attention last Fall, but I never wrote about it. Now, though, the questions are piling up again… and the latest version of the ad is spilling hype out over the top of the jug even more than usual, so I thought I’d quickly chime in and give it the Thinkolator treatment for you.

The spiel is from Robert Williams, and most version of it that I’ve seen are still dated October 2014 — though I’ve had the ad sent to me quite a few times in just in the last couple days. Here’s how they describe this “alternative currency” …

“An alternative currency – already in circulation across America – could soon explode in value.

“As you’re about to discover, it could hand you as much as $56,700 over the next 9-12 months.

“Some people are already calling it the ‘next Bitcoin.’ And that’s saying a lot.

“As you may know, Bitcoin is the digital ‘cryptocurrency’ that has disrupted economies worldwide. It has also made some investors a fortune along the way.

“Over the course of just three years, Bitcoin’s value skyrocketed more than 1,632,316%.”

Which, of course, does not make you think of the word “currency” — currency is something you use for transactions, and if it’s jumping around in value like that no one is going to either offer or accept it in transactions… for a while there, bitcoin might have doubled in value while someone was in the process of trying to use it to make a purchase. Bitcoin did rise that ridiculous amount over three years, but essentially all of the jump came in 2013 when it went from about $10 to over $1,000 — until then falling by 70% or so since then.

(I bought a few bitcoin to check it out and experiment at the time, largely to see how it would work for money transfers and as a substitute for credit card and bank transfers that generate such large fees… and I think I still have something less than a full bitcoin in my Coinbase wallet, for full disclosure — it didn’t end up being useful for me, but perhaps it will be someday.)

All of which is irrelevant to the point here — despite the value bitcoin has in capturing your attention. The point is that Williams is saying that “this one simple investment could put as much as $56,700 into your bank account over the next 9-12 months.”

And, of course, that was originally written back in October — so we should be at least halfway there, right?

Not so much… but more on that in a moment. Here’s the meat of the pitch:

“Another currency is poised to upset Bitcoin as the world’s No.1 cryptocurrency.

“In fact, it’s fast rivalling the dollar for many transactions online.

“Already, dozens of Wall Street banks including Morgan Stanley, BlackRock, Credit Suisse, Bank of New York Mellon, and Bank of America are amassing positions alongside this currency in their “in house” accounts.

Forbes calls it ‘profit enhancing.’

Business Insider says it has the potential of ‘taking over our wallets.’ says ‘You can beef up your individual retirement account with it.’

“According to our research, this currency is about to boom – worldwide.

“One simple investment now could set you up for years. (And I can show you how to get started for less than $20 bucks!)”

So, as you have probably guessed, this “currency” is just a broad term that Williams is using to describe rewards points — the points you get for charging stuff to your special credit card, or using a particular airline or hotel chain or retailer, and that you can redeem for discounts or free stuff.

And no, Williams is not, at least, being crazy enough to suggest that people actually buy rewards points — though you can do so in many rewards programs, and I suppose it could make sense if you were just 100 airline miles away from a free trip to Tahiti or something like that… but is otherwise, of course, completely ridiculous.

If you’re curious, the stories that those quotes are from are perfectly ordinary articles about particular rewards points deals — like the Bankrate clickbait article about the variouos kinds of rewards programs, including some from Fidelity that will let you turn “points” into (very small) cash rewards deposited into an IRA or a 529 plan.

So what is this “explosive situation” that Williams says we have with this “alternative currency?”

Well, first Williams has to convince us that these “points” have great value… here he goes:

“Unlike Bitcoin – and even the U.S. dollar – this currency is backed by real, tangible assets.

“That makes it perhaps the only currency on Earth with intrinsic value.

“Some folks even prefer it over spending regular dollars.

“At any time, you can use it to buy a brand new Samsung HD TV, an iPhone 6, or even a fresh cup of coffee. And even if the U.S. dollar crashes, this currency’s buying power could skyrocket! (No, it’s not backed by gold.)

“For reasons you’re about to see, this currency is PERFECT for buying high-end merchandise: Tropical vacations in the Caribbean… Golf equipment… First-class travel around the world… Stays at top-end hotels… The list goes on.”

That’s all rather silly — if you’ve ever used rewards points you know that, yes, every once in a while you get a nice bonus, like a free hotel room or a free flight after spending $10,000 or so on other flights… heck, I’ve even gotten a few nice, enduring rewards like a couple new laptops over the years. But I don’t think anyone will be focusing on their rewards points as a way to survive if the US dollar crashes. And of course we prefer using “points” to buy our vacations and golf clubs — duh. That’s because points aren’t really money, they’re just a more direct expression of a company’s marketing budget and we know we have to use ’em up before the company changes the terms and the points suddenly become worthless.

So how is it that we’re going to get rich from these things? Here’s what Williams says:

“In order to collect rewards points, you have to buy a TON of stuff. To get $50 worth of rewards points from Best Buy, you’d have to accumulate 2,500 rewards points. But to get those 2,500 rewards points, you’d have to spend $2,500!

“However, I’ve discovered an amazing ‘loophole’ in America’s rewards-points system.

“By spending between $15 and $30… you can profit from MILLIONS of dollars’ worth of rewards points!”

Sound better? Can we really “mine” rewards points?

“It allows you to (legally) bypass traditional rewards programs – without stepping foot in a store.

“Imagine being handed 11.34 million ‘Hilton Honors’ rewards points without ever reserving a hotel room…

“Or collecting 3.4 million ‘Southwest Rapid Rewards’ points without ever boarding a plane… “

Sounds appealing, right? Maybe you were already suspicious that there was a “secret” loophole way to get all those bazillions of points and live like a rock star?

Oh, but wait, then he says we’re going to do this in our “discount brokerage” account… so it’s a stock?

“In fact, depending on your situation, this currency play – which you can execute through your regular discount brokerage – could unlock up to $10,000… $50,000… and in some exceptional cases, up to $1 million in profits.

“It takes advantage of all of the most popular rewards programs available today….

“I peg the value of your first opportunity at upwards of $56,700.”

I hate to break this to you, but when a newsletter ad copywriter says that you could make huge profits “in exceptional cases,” it almost always means “if you invest an exceptionally huge amount of money.” Notice that he mentioned only the profits you could make, not the amount you’d have to invest to earn those profits.

So, yes, this is some kind of stock that’s involved in the rewards points business … here are some more clues:

“… one of my closest and trusted industry contacts – a technology genius – briefed me on a company with a direct stake in all of these very programs, I did a deeper dive.

“He told me that shareholders of this company – ordinary people, that is – are enjoying an opportunity to gain a controlling interest in upwards of 5.67 million Amazon Rewards points… without buying a single piece of merchandise.

‘It instantly moves you straight to the front of the line,’ he said.

‘Kind of like a “Cheat Code?” I replied.

‘Well, cheating,’ he said, ‘implies wrongdoing… this is a 100% legal way to leverage the rewards points systems of tons of top retailers.'”

And he further gets into that “cheat code” idea…

“Thanks to a certain company’s recent innovation… a four-digit Cheat Code could put as many as 29,076 cups of Starbucks coffee working in your favor. Or just skip the morning latte altogether, and still gain a controlling interest in tons and tons of points.”

No, there isn’t a “cheat code” … that’s a misleading reference to the ticker symbol of the company, which they’re implying is a four-digit “cheat code” that gives you “controlling interest” in millions of rewards points.

And apparently there are already some big time Wall Street firms involved…

“… some of the biggest players on Wall Street have quietly begun leveraging these rewards points systems, and they’re minting fortunes as a result.

“Deutsche Bank was among the first to hit paydirt. The value of its “points” portfolio now stands at $2.1 million….

“In fact, 42 institutions are positioned alongside this rewards points boom, representing a net value of over $166 million.
Morgan Stanley, BlackRock, Credit Suisse, Bank of New York Mellon, and Bank of America are among the early players.”

OK, so even if that wasn’t a silly way to describe the fact that a company has institutional investors, the amounts are laughably small — a net value of $166 million spread among all those big-name firms (and many more) might as well mean that Morgan Stanley is having a summer intern handle that investment.

And then one final clue for us:

“Likely feeling the pressure, the CEO of the company of the world’s first ‘rewards points’ farm released a statement a few weeks ago saying…

‘We continue to execute against our new partner pipeline. In June, we officially launched the Hilton Honors Program as planned. We’re pleased to have one of the world’s largest and most successful hospitality loyalty programs participating on our platform.’

“I expect the company to be actively mining the rewards points of 10 additional top retailers in the next six months.”

And one final bit of tantalization to get the greed receptors perked up…

“… the Cheat Code represents an instant opportunity to gain a controlling interest in upwards of 11,340,000 Hilton Honors Points… 3,395,210 Southwest Rapid Rewards Points and 141,750 My Best Buy Rewards Points.

“Your first opportunity is valued at $56,700.

“Do with the proceeds whatever you please…

“First-class seats whenever you want them.

“Room upgrades.

“Or just pocket the cash.”

So what is it? This is, as many readers have guessed, just a loooong and overly (and misleadingly) hyped tease about buying a stock called Points International (PCOM, PTS in Toronto).

And the stock has fallen at least 50% since Williams started touting it last Fall (depends on the day you pick — it has essentially moved steadily downward since mid summer of 2014)… so is it a better buy now that it’s cheaper?

Points is profitable now, though it’s very small with a market cap of about $150 million, and they call themselves the “global leader in loyalty currency management.” What they essentially do is sell services to loyalty points programs, resell points, and also offer (for companies who participate) a marketplace where customers can buy, sell and trade loyalty points. Here’s how they put it in their fourth quarter report, which came out last week:

“The Corporation operates in one segment, providing web-based solutions to the loyalty program industry. The range of ecommerce services include the retailing and wholesaling of loyalty program currencies, a range of additional ecommerce products that enhance either the loyalty program’s consumer offerings or its back-end operations, and management of an online consumer-focused loyalty points management web-portal. The Corporation’s operations can be influenced by seasonality. Historically, revenues are highest in the fourth quarter in each year as redemption volumes and promotional activity typically peak at this time, however this is dependent on changes in the Corporation’s partnership base and effectiveness of promotional activity.”

They have grown pretty nicely over the past year, largely because they added Southwest and Hilton to their client base, but they don’t really own the points that they deal with on a transaction basis so their gross margin has stayed about the same — meaning that the business doesn’t offer much leverage, at least so far. To make each $2 in profit, you have to make another $100 in sales — the margins have not improved over their last five years or so and have, in fact, often gotten worse, despite nicely growing sales. That gives some indication of the fact that they don’t have much leverage over their partners, I suppose, because their “cost of goods” is mostly the money they owe to the companies who own and run these loyalty programs… though they do continue to get new partners — they are losing much of the US Airways business because their relationship with American Airlines (with whom they merged) is not as good, since AA is taking more of the business back in and they effectively lose most of what had been their US Airways business, but they did just bring on United Airlines, and they remain confident of growth in 2015.

You can see the transcript of last weeks earnings conference call here. I haven’t read all the filings, but they appear to be trying to establish a standard for these rewards programs, push for transferability (through their platform, presumably earning a commission both for them and their reward program partner), and the building of what they refer to as a “loyalty wallet” where you can store the value of your dozens of rewards programs cards/numbers/accounts. I presume that’s at least somewhat of a tough sell, given that companies generally want to keep tight rein on their loyalty programs — or at least to keep control of their customers and the data — but I don’t really know. You can see the current progams they work with, on various levels, here on the consumer-facing part of the website.

If the Points marketplace/wallet is to achieve meaningful scale this will probably really be driven by whether or not it’s so enticing for consumers that they demand this trade and exchange service from loyalty program providers — they do convince partners to come on board, in part, by guaranteeing to purchase a certain number of points/miles from them, and that’s a nice cash infusion, but it’s probably not decisive for the larger companies. The more valuable partnerships, the ones where they run a Buy/Sell/Reinstate program for the loyalty card members (ie, you can buy in to “reinstate” your expired United Airlines miles, for example, or buy miles to get over the hump to get a free ticket), seem to mostly drive revenue on something like a brokerage basis, with the lion’s share of revenue from buying or trading or upgrading points being turned right around to pay the airline (or whoever).

So right now, this looks to me like a decent services company that has very little scalability but should be able to grow earnings by perhaps a little bit more than they grow revenues — and they are expecting growth this year, with the anticipation that the growth will be front-loaded (presumably because they just brought on United Airlines). Their guidance for 2015 is for revenue to grow 15-20% and EBITDA to grow 15-25% — if we are fairly optimistic and anticipate that they might grow earnings per share by 20% (they do have a buyback authorization and more than $30 million in cash, so they can juice their per share numbers a little bit if they wish… though they’ll probably also issue shares for employee compensation), then that would mean that 2015 earnings per share might hit 36 cents. The shares are just shy of $10 right now, so that’s about 28X 2015 earnings.

That doesn’t sound cheap, but I wouldn’t want to assume much more growth than that. If you go out another year, the analysts get super-aggressive with their forecasts and have the company creating earnings growth of 75% or so, which is why they have a forward PE of 15 (forward PE usually goes out at least a full year, so now that’s using 2016 numbers). I’d have to love this company’s product or prospects a lot to pay this amount, or to assume that they can turn a couple years of 15-20% growth into 75% growth all of a sudden.

If you want some reason for optimism, you can back out the $2.50 per share in cash and then you’d be paying $7.50 for 30 cents in earnings and anticipated 20% earnings growth… that’s a little more reasonable, an ex-cash PE of 25 and 20% growth, so the PEG ratio would be only 1.25. Not bad for a small company if you expect the growth to continue, though do note that a year ago the cash balance was over $60 million (they used much of that for acquisitions, including buying PointsHound, that will add to expenses and future potential — they largely bought to get the coders and a San Francisco office, it appears — but not to immediate revenues).

Still, I have a hard time seeing huge profits this year unless they sign a ludicrously massive partner — and with United Airlines and Southwest and other big players already on board as clients, and American Airlines leaving, the number of really “high impact” client adds seems small… unless their collaboration with MasterCard (which seems pretty early-stage, from the comments I read) generates a lucrative string of deals with big banks for their “points” cards… if the stock goes up by, say, 20% this year then in order to book those teased profits of $56,700 you’d have to start with an investment today of about $280,000 (and, of course, it might not go up 20% — it could double or triple and reach the old highs of $30, perhaps, or it could lose clients and revenue or hit a scandal and collapse to pennies). But, as you might have guessed, I see no possible way for this to generate the ludicrous bitcoin-bubble gains that are hinted at in the ad, there’s no 1,000,000 percent gain in store for PCOM, not even if they take over every loyalty program they can imagine — that doesn’t mean PCOM is worthless, but it sure means “cool your jets” and “temper your expectations.”

And that’s about all I can tell you after sniffing around the company’s filings for a couple hours today — if you look into Points (PCOM) and think it looks more appealing than that for some reason, I’d love to hear the reason — they are in transition and the industry is changing, it is an interesting idea, and revenue growth is certainly possible, but I just don’t see the scalability of it (from an income perspective) since so much of their cost of goods is simply paying to buy points from their loyalty partners and they appear to have very little pricing muscle with those partners… at least, so far. Please share your thoughts with a comment below.

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