American Express (AXP 0.35%) continues to be a winning position for shareholders. The total return of 154% in the past five years is certainly exceptional. And there is no shortage of reasons to appreciate this high-quality business.
As of this writing, this Dow Jones Industrial Average constituent trades at record levels. Should you buy American Express while it’s below $315 per share?
Uniquely positioned
American Express has a special place within the broader financial services industry. Investors are familiar with its premium credit cards that come with valuable perks and rewards. This makes the company a lender, taking on credit risk in the process of being an issuer.
What’s more, the business also operates a closed-loop payment platform, connecting its cardholders with merchants to facilitate transactions. This means Amex is able to collect fees from merchants for providing this essential service
This unique business model is valuable because it supports the company’s competitive advantages. Its credit cards resonate strongly with consumers, creating a powerful brand that sits at the premium end of the market.
And the payment platform benefits from network effects. As more cardholders and merchants join, it immediately becomes more valuable to all stakeholders. That’s because there are more places to shop (for cardholders) and more customers to generate revenue from (for merchants).
Simple growth strategy
American Express generated $16.6 billion in revenue in the third quarter of 2024 (ended Sept. 30). That figure was 51% higher than in the same period five years before, translating to an annualized gain of 8.6%. The growth formula is pretty straightforward.
The primary objectives for the company are to add more cards in force, of which it had 145.5 million as of Sept. 30. This was up 5% year over year, driven by growth among Gen-Z and millennial customers. Another lever is pricing power, where Amex raises annual fees for its credit cards.
Add this to a backdrop of higher economic growth over time, and the company’s network sees greater spending volumes. Adding more partnerships with specific airlines, hotels, or retailers also incentivizes spending.
If history is any indication, then Amex will have no issues being able to successfully execute on its growth plans. The company has steadily expanded over the years, and it’s in a wonderful position to keep this up.
Risk factors
Of course, investors shouldn’t ignore things that could get in the way of this positive trajectory. One obvious speed bump would be an economic downturn. In such an unfavorable scenario, Amex would likely see spending take a hit, leading to weaker revenue. Moreover, its cardholders might start falling behind on payments, which could hurt earnings.
Historically, recessions last much shorter than expansionary periods. I’m confident that the business will be able to make it past an adverse event.
Competition is another thing to always be mindful of. Card issuers like JPMorgan Chase and Capital One, for example, also target affluent customers with their premium credit cards, which could make things difficult for American Express.
Rising expectations
At about $313 per share (as of Jan. 17), American Express at least deserves a closer look from investors. But its valuation has gotten richer, with the stock trading at a price-to-earnings ratio of 23. That’s 42% more expensive than just 12 months ago. The market has become bullish about its prospects as we look to the near term.
With shares below $315, the best course of action is probably to dollar-cost average into a full position over several transactions. By doing this, you can take advantage of multiple price points when acquiring a stake in a high-quality business.
JPMorgan Chase is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
