Investors have underrated American Express(NYSE: AXP) for years. Competing payment networks Visa and Mastercard dominate the payments discussion and trade at premium valuations. And yet, over the past five years, American Express stock is actually outperforming both Visa and Mastercard. I bet few people would assume this was the case.
Less than two weeks ago, American Express hit an all-time high after posting strong earnings yet again for the second quarter. The stock is down roughly 6% since then, but it is still up more than 100% in the last five years. Here's my prediction for what comes next for American Express stock and whether the stock is a buy right now.
Strong volume growth, winning among younger consumers
American Express runs a vertically integrated credit card business. It not only operates as a payment network, it also issues credit cards to customers, targeting wealthier people with high spending power. These high-fee cards drive revenue and insulate American Express from recessionary periods. During a weak economy, wealthier people are more likely to keep up their spending than others. It is that simple.
In 2024's Q2, American Express posted 8% payment-volume growth. Since the business model involves taking a cut of every payment transaction, payment-volume growth translates directly to revenue growth. Sales were up 8% as well in Q2 to $16.33 billion. The company is adding over 3 million new card customers every quarter, the majority of whom are coming from Gen Z and millennial demographics.
Younger customers have been a new growth driver for American Express and are important for long-term growth as well. Attracting high spenders to the network, these younger customers will have huge lifetime values if they stick with American Express for 10 years, 20 years, or even longer. It is great to see American Express adding new credit cards each quarter. This is the lifeblood of its business model. Without credit card users, there is no American Express business.
A wide moat with room for expansion
Network effects can give a business a wide moat, and I believe American Express has a superior one due to the nearly 150 million credit cards it has in circulation and the tens of millions of merchants accepting those cards. Any company starting from scratch would have a tough time building both this payments network and credit card business. That is why the only competitors in credit cards are the likes of JPMorgan Chase, partnering with Visa, or Capital One, which is actually buying another payments network in Discover.
It is no surprise, then, to see Warren Buffett -- the king of moats -- owning over 20% of American Express for Berkshire Hathaway. I believe this moat can widen over the next decade through international expansion. In the United States, American Express has virtual parity with Visa and Mastercard with merchant acceptance, but this is lacking outside of North America. Management has worked hard to close this gap but still has a ton of room to reinvest. International locations accepting American Express have grown by 4 times since 2017.
Getting global-merchant acceptance does a few things. First, it allows more existing customers -- mainly from the United States -- to spend money using American Express cards internationally. Second, it gives international customers a better value proposition for obtaining an American Express card. Third, it further separates American Express from the competition, widening the moat while also growing the business. Not a bad position to be in.
AXP Shares Outstanding data by YCharts.
What comes next for American Express?
With the stock close to all-time highs, American Express trades at a market cap around $169 billion. It is one of the largest companies by market cap in the world. But what comes next for the storied credit card brand?
Management lays out its financial plans succinctly. Payment volume, card fees, and interest income on card loans can drive 10% revenue growth. Strong loan underwriting and operating leverage can drive even faster earnings growth. Add in share repurchases that have brought down shares outstanding by 30% in the last 10 years and earnings per share (EPS) can grow at a mid-teens level over the long term.
If this happens -- and I think it is likely -- American Express stock will keep climbing higher over the long term. At Friday's prices, shares traded at a price-to-earnings ratio (P/E) near 18, which is well below the S&P 500 market average. Holders of American Express have no reason to sell right now. For those thinking of buying, now looks like a perfect time even with the stock close to all-time highs. This is one of the best businesses in the world that you can get at a fair price.
Should you invest $1,000 in American Express right now?
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Mastercard, and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
