American Express stock recently hit an all-time high: My prediction for what’s next

Investors underestimated American Express (AXP 1.85%) for years. Competing payment networks Visa and MasterCard dominate the payout discussion and trade at premium valuations. And yet, over the past five years, American Express stock has actually outperformed both Visa and Mastercard. I bet few people would assume this to be the case.

Less than two weeks ago, American Express hit an all-time high after posting strong second-quarter earnings again. The stock is down about 6% since then, but is still up more than 100% over the past five years. Here’s my prediction for what’s next for American Express stock and whether the stock is a buy right now.

Strong volume growth, winning among younger consumers

American Express operates a vertically integrated credit card business. Not only does it work as a payment network, it also issues credit cards to customers, targeting wealthier people with high spending power. These high-fee cards generate revenue and insulate American Express from times of recession. During a weak economy, wealthy people are more likely to keep up their spending than others. It’s that simple.

In the second quarter of 2024, American Express saw an 8% increase in payment volume. Because the business model involves a cut of each payment transaction, increased payment volume translates directly into increased revenue. Sales also rose 8% in Q2 to $16.33 billion. The company adds more than 3 million new card customers each quarter, the majority of which are from the Gen Z and millennial demographics.

Younger customers have been a new growth engine for American Express and are important to long-term growth as well. By attracting high spenders to the network, these younger customers will have huge lifetime values ​​if they stay with American Express for 10, 20 years or even longer. It’s great to see American Express adding new credit cards every quarter. This is the lifeblood of its business model. Without credit card users, there is no American Express business.

A wide trench with room to expand

Network effects can give a business a wide moat, and I think American Express has a superior one because of the nearly 150 million credit cards it has in circulation and the tens of millions of merchants that accept those cards. Any company starting from scratch would have a difficult time building both this payment network and the credit card business. That’s why the only competitors in credit cards are like that JPMorgan Chasein partnership with Visa or Capital Onewhich is actually buying another payment network in Discover.

It’s no surprise, then, to see Warren Buffett — the king of the trenches — own more than 20% of American Express for Berkshire Hathaway. I think this moat can widen in 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 plenty of room to reinvest. International locations accepting American Express have increased 4x since 2017.

Gaining global merchant acceptance does a few things. First, it allows more existing customers — primarily in the United States — to spend money using American Express cards internationally. Second, it offers international customers a better value proposition for getting an American Express card. Third, it further separates American Express from the competition, widening the moat while growing the business. Not a bad position to be in.

AXP Shares data outstanding by YCharts.

What’s next for American Express?

With shares nearing all-time highs, American Express trades at a market capitalization of about $169 billion. It is one of the largest companies in the world by market capitalization. But what’s next for the credit card brand?

Management presents its financial plans succinctly. Payment volume, card fees and interest income on card loans can generate a 10% increase in revenue. Strong loan underwriting and operating leverage can drive earnings growth even faster. Add in share buybacks that have reduced shares outstanding by 30% over the past 10 years, and earnings per share (EPS) may rise to mid-teens over the long term.

If that happens — and I think it’s likely — American Express stock will continue to rise over the long term. At Friday’s prices, the stock was trading at a price-to-earnings (P/E) ratio of nearly 18, which is well below the S&P 500 market average. American Express holders have no reason to sell at this time. For those considering buying, now seems like a perfect time even with the stock near all-time highs. This is one of the best deals in the world that you can get at a fair price.