Should one Purchase, Sell, or Maintain Their Investment in American Express?
American Express (AXP) shares have been on a remarkable surge, increasing by a whopping 100% within the past 14 months (as of Dec. 16). This impressive growth has pushed the shares to succeed in hitting new all-time highs throughout 2024.
Given such substantial gains within a short span, investors might be uncertain about what the wisest move is in terms of American Express and their investment portfolios. Should buyers consider purchasing, selling, or hanging onto this financial asset?
Robust competitive advantages
American Express is an outstanding company with a substantial economic moat. This tenacity stems from its possession of sustainable competitive advantages that have solidified its position within the industry, shielding it from competitors. I am convinced that Amex maintains two primary advantages in this regard.
The company's reputation is a significant element of its moat. By projecting itself as a premium credit card brand, American Express manages to attract an upscale clientele. These patrons have the capacity to spend more than the typical individual.
Targeting this market segment enables American Express to charge hefty annual fees for select top-tier credit cards. Yet, the number of active cards has steadily increased over time, from 111.1 million in the third quarter of 2014 to 145.5 million in the last quarter. Moreover, the company has witnessed a noteworthy increase in the average fees per card, a figure that increased by 13% year over year in Q3.
The Amex brand has also successfully resonated with a younger demographic. "Spending across our affluent U.S. consumer base remained relatively steady and displayed strong growth from millennial and Gen-Z customers, up 12%," CFO Christophe Le Caillec stated amid the Q3 2024 earnings call. This growth rate surpassed that of any other age group. The company stands to gain from these consumers, as they are likely to continue as customers for an extended period.
American Express additionally benefits from potent network effects. The millions of active cards in circulation worldwide are invaluable to merchants hoping to avoid missing out on potential revenue-generating prospects. Conversely, Amex's acceptance at 89 million merchant locations worldwide offers cardholders numerous venues to spend their cash. As each group expands, the value of the Amex network escalates.
Stable fiscal performance
American Express has witnessed consistent growth due primarily to increasing consumer expenditure across the economy. The rise in cashless transactions also contributes to this trend.
As a direct consequence, there has been a continuous enhancement in payment volume, which totaled $441 billion in Q3, representing a 5% rise year over year. Predictably, this upswing is bolstered by Amex welcoming new card members and the company's numerous lucrative partnerships, such as those with Delta Air Lines, Marriott International, and Uber Technologies, which allow customers to amass more rewards, serving as incentives for shopping activity.
It goes without saying that this growth has led to revenue expansion over the years. In the last decade, the revenue has nearly doubled. Moreover, with a 15% net income margin in Q3, this is an unequivocally profitable business.
Investor satisfaction is bolstered by management's financial allocation practices. In 2024, the business has already paid out $1.5 billion in dividends and redeemed $5 billion worth of outstanding shares.
American Express's valuation
American Express shares' impressive performance in the preceding 12 months or so has resulted in the stock becoming more expensive. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 22.3. This ratio represents a premium compared to its trailing three-, five-, and 10-year average P/E multiples. It's safe to conclude that the current market situation is less than appealing for prospective investors looking for bargains.
However, I firmly believe that there are numerous reasons to acclaim American Express's business, ranging from its competitive strengths to its steady growth, consistent profits, and investor returns. What's more, the current valuation is not exorbitantly excessive.
Therefore, if you're currently an investor, I don't believe that there's a compelling reason to sell at this juncture, making the stock an excellent hold at present.
After considering American Express's robust competitive advantages and stable fiscal performance, investors might contemplate reinvesting their money into this financially sound company. The company's premium brand image, attractive annual fees, and growth in the millennial and Gen-Z consumer base make it an appealing investment option.
Given American Express's consistent growth in revenue and impressive net income margin, along with its network effects and lucrative partnerships, it could be a wise decision for investors to hold onto their existing investments or even consider increasing their stakes in the company.
