• Nick Burgess

American Express Stock - The Ultimate Credit Card Company?

Updated: Feb 18

American Express - The Luxury Credit Card for Everyone

Credit cards are oftentimes viewed as the financial boogeyman: you open a credit card to buy something with someone else's money and then get crushed under the weight of high-interest and fees. Well, that can certainly be true. However, when used correctly, credit cards can be a new and magical world, full of free travel and cash back.


This credit card churning group of experts has suddenly become much louder over the past few years thanks to websites like The Points Guy and YouTube channels like Trek Trendy exploding in popularity. Now, consumers are out to get the best bang for their buck on sign-up bonuses, membership rewards and annual fees. When they search for the top cards in the industry, one company tends to stand out ahead of the rest: American Express.

Today, I'm going to get into the fascinating history of American Express, where they fit into the overall credit card market and how they're able to kick the absolute crap out of the rest of the industry. This is my deep dive into American Express. Let's go!


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This article is for entertainment purposes only, and should not be taken as investment advice. For individual situations, please contact an investment professional. The author does not have a financial stake in American Express (AXP) and does not plan on opening one in the next 72 hours.


Top-Line Numbers

  • FY 2020 Revenue: $31.36 billion (-21.57% YoY)

  • FY 2020 Net Income: $3.14 billion (-53.62% YoY)

  • Q3 2021 Revenue: $11.12 billion (+37.51% YoY)

  • Q3 2021 Net Income: $1.83 billion (70.18% YoY)

  • Market Capitalization: $135.80 billion

What Is The Business?

American Express is a credit card issuer of both consumer and business credit cards and alternative financing, featuring an extensive list of credit cards that offer different incentives, bonuses and partnerships to provide value to the user.


American Express makes their money from three different revenue streams:

  1. Loan interest payments for credit cards and lines of credit (both personal and corporate)

  2. Annual fees

  3. Merchant transaction fees

While these aren't unique to American Express, the revenue split is pretty different.


Interest Payments

While American Express's interest rates on carried balances aren't unusual, the revenue volume from this metric actually is. Most American Express customers don't actually carry balances on their cards as their audience tends to be more "financially savvy." That's thanks to the high-end credit scores required to actually qualify for an American Express card, resulting in fewer users carrying a balance. However, the high barrier to entry is a double-edged sword, because it allows American Express to charge through the nose to even have their cards in your wallet.

Annual Fees

Annual fees are what credit card providers charge in order for you just to keep the card each year. Annual fees vary wildly across providers, and even across cards from the same provider. For example, the American Express Blue Business Card has no annual fee. The American Express Delta Gold co-branded card has a $99 annual fee, and the American Express Gold Card has a $250 annual fee.

The American Express Centurion Card
The American Express Centurion Card

The biggest elephants in the room, however, are the American Express Platinum Card and the American Express Centurion Card, which have annual fees of $695 and $5,000, respectively.


However, there is usually a point to these annual fees from the consumer's perspective: add-ons and benefits. For example, the $695 fee that comes with the American Express Platinum card includes benefits like: monthly statement credits for Equinox, Uber and Audible, an annual airline incidentals credit and an annual hotel credit, among a laundry list of others including the pretty excellent Fine Hotels and Resorts portal. Credit card pros estimate that the Platinum Card can return to you about $1,400 in value if you maximize the benefits, giving you, the consumer, an effective ownership benefit of $705.

American Express's Fine Hotels and Resorts portal
American Express's Fine Hotels and Resorts portal

Despite some hefty annual fees, however, this isn't actually where American Express rakes in most of their cash. That is down to their Merchant Revenue division.


American Express Merchant Revenue

This is the segment that most consumers won't be as familiar with, because it's not really something we think about. We go to a store, grab our item and swipe the card to pay, then we're done. Well, for the merchant, the process is quite different.

For the merchant, the customer comes into your store and buys something. That swipe of the card actually just cost you money, and the amount of money varies on every transaction. Why? Because each card provider charges different fees to the merchant, which includes percentages that will see merchant rates fluctuate.

credit card processing fees for visa, mastercard, discover and american express
The average credit card processing fee by payment network

This is where American Express makes most of their revenue. Look how much higher their splits are in the table above than the other main competitors in the credit card processing space. They are the only card issuer that tops 3% on the high end, which is how they were able to provide some stellar numbers in their most recent earnings report.


How Did American Express Get Started?

I actually want to spend a bit of time on this part, because it turns out that the story of American Express is nearly foundational to commerce in America. We have to go all the way back to 1850, when American Express had nothing to do with finance.


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The three founders of American Express, Henry Wells, William Fargo and John Butterfield, all owned individual mail carrier businesses in northern New York State, when they decided to merge and monopolize the sector in 1850. The company essentially owned the transportation lines (both rail and horse carriage) between Buffalo and New York City, handling an enormous volume of shipping transactions. This led to the introduction of their own money order product in 1857, which they touted they could deliver more reliably and faster than the United States Postal Service. They embodied this notion with their new logo, a dog on a suitcase.

It was after this that they also introduced traveler's cheques into their catalog, now giving American Express international exposure. The British government subsequently named them their official agent at the beginning of World War One, which is apparently something that was a...priority(?) for the British government at the onset of one of the biggest wars in history.


At the same time, the founders looked to expand outwards from northern New York State, owning larger and larger swathes of the north-eastern United States into the early 20th century. During this time, they also began to amass somewhat of a real estate empire, eventually buying up $28 million worth of real estate in New York and Buffalo, making them the second largest New York-located company by assets by 1903, only trailing the National City Bank of New York in enterprise value.


Two of the three founders, Henry Wells and William Fargo, pushed the American Express board to expand operations westward, wanting to move into the newly abundant territory of California. The board refused, resulting in the departure of the two men to form their own company: Wells Fargo. Oof.


Fast forwarding to late-World War One, and President Teddy Roosevelt is now in power. One of the major points on his agenda was to combat monopolies, and his scope turned squarely on American Express and their railroad business. This resulted in the forced spin-off of the American railroad system by the Interstate Commerce Commission, 40% of which was turned over from American Express. This forced American Express to lean heavily into their finance-related products, which expanded in 1958 with the introduction of the credit card.

The first American Express credit card, issued in 1958
The first American Express credit card, issued in 1958

From there, American Express began introducing new features like membership points to reward loyal users of their credit cards. After that, they saw aggressive expansion into Europe and South Africa. This eventually culminated in the release of American Express's most popular, and famous, product in 1984: The Platinum Card.

Now knowing how weirdly important this company is to essentially the founding of American capitalism (including inclusion in the original Dow 30 where it remains), let's now look at how this company fares as an actual investment.


The Bull Case

Incredible Revenue Generation Against Peers

So if you're still with me so far, you now know that American Express holds one key advantage over their competitors: merchant transaction fees. Despite the company actually being quite a bit smaller than both Visa and MasterCard in terms of both market capitalization and number of cards in circulation, American Express absolutely BODIES the other two when it comes to revenue generation. Here's what I mean:


2020 Credit Card Issuance and Unit Revenue*

Issuer

Cards In Circulation (U.S)

Cards In Circulation (International)

Total Revenue (10/2020-10/2021)

Revenue per Unit

Visa

343 million

798 million

$24.10 billion

$21

MasterCard

249 million

725 million

$17.78 billion

$18

American Express

53.8 million

58.2 million

$40.97 billion

$366

*source


American Express, on a unit economics basis, blows the cover off of their competition like Soler in Game 6. Why? Those merchant fees!


American Express's most recent earnings call showed the power of these fees when they reported that total Q4 transaction volume had increased 33% from Q4 of 2020, and 19% higher than Q4 of 2019. And don't forget about what American Express's bread-and-butter purchases are: travel and leisure. These purchases saw a recovery last quarter that's nearly back to pre-pandemic levels, according to American Express. These are BIG ticket items that are seeing strong transaction volumes, which led to a $12.1 billion quarter at a $2.18 EPS (beating analyst consensus by 16.8%).


American Express's Valuation Is Pretty Reasonable

The most recent quarter for American Express has really put their valuation metrics into perspective, especially when compared to their peers. At time of writing, the Q4 2021 earnings report popped the stock to a $123.5 billion valuation, which pales in comparison to MasterCard ($349.4 billion) and Visa ($442.2 billion). That puts American Express at a pretty reasonable 17x P/E ratio, which sits about in the middle of payment processors around the world. MasterCard clocks in at a whopping 41x P/E, and Visa at 34.18x P/E.

American Express also raised their guidance for 2022 in their most recent call, now guiding for a 20% year-over-year revenue growth compared to last year. This is compared to Visa's projected 17% growth rate for FY2022, meaning American Express is truly competitive in the payment processing space.


Luxury and Exclusivity in Products and Partnerships

Taking a break from the quantitative metrics for a minute, let's look at what American Express truly values themselves on: luxury.


American Express, as I mentioned before, is a purveyor of luxury and high-class, especially in the travel industry. They have an exclusive deal with Delta Airlines, consistently ranked the #1 U.S-based airline, which allows them to issue co-branded credit cards with Delta, as well as transfer their own American Express membership points to the program. This partnership also allows high-end American Express card holders to enter Delta airport Sky Clubs, as well as vice-versa for the American Express clubs.


Speaking of, we have the Centurion Lounge. While there are only a few scattered throughout the world, these airport lounges are viewed as best-in-class, with unique food from Michelin star chefs and bars that see themselves as throwback speakeasies. If you regularly fly out of an airport that contains a Centurion Lounge, it's worth swinging by to see what all the hype is about. These are starting to look a bit like the underwhelming rides at Disney World, though, and overcrowding at these lounges is starting to become a real issue. So much so, in fact, that American Express is now instituting a fee for Platinum Card, Centurion Card and Delta Reserve Card holders to bring guests.

The American Express Centurion Lounge at JFK Airport
The American Express Centurion Lounge at JFK Airport

American Express also offers digital experiences that other credit card issuers are struggling to keep up with, the most notable of which is the Fine Hotels and Resorts portal. American Express, by virtue of having an audience with high credit scores and likely higher net-worth statements, has been able to strike exclusive deals with upscale hotels around the world to be able to provide unique benefits like free room upgrades and complimentary breakfast, WiFi, etc. The catch? You have to hold a Platinum or Centurion Card in order to access it, essentially meaning you're on the hook for $695 annually if you want to join in on the fun.


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Inflation!

Much like my conclusions around Affirm Holdings, inflation is quite a bull case for financial services companies. Why? Yes, those merchant fees are back!


So we've all seen the headlines: "Inflation up highest in 30, 40, 50 years," and that's true in most cases. On average, inflation in the United States was up 7% in 2021, due in part to free money being thrown at us like Oprah throws free cars, and also due to unprecedented rises in employee wages thanks to The Great Resignation.

However, digging into the CPI numbers actually tells a different story on inflation, specifically as it pertains to American Express. While general consumer inflation is up 7%, travel and leisure is actually up closer to 14% on the year. Now think back to my breakdown of the merchant fees that American Express charges on each transaction. Couple this with American Express's shtick being maximizing travel, and you have a recipe for merchant fees out the ass. American Express is a strong beneficiary of inflation across the board, but a 14% spike in the travel and leisure segment could be a massive growth driver in the near term since their merchant fees are a dynamic percentage of the total transaction cost.


The Bear Case

Consumer Spending Could Be Waning

The COVID-19 pandemic that forced everyone indoors also forced everyone to save a bit of cash. Those that kept their jobs during the pandemic had nothing to spend their money on; no annual big vacation, no eating out since the restaurants were closed, and most of us got cash thrown out of hot air balloons from the government with nothing to spend it on. As a product of the environment, the personal savings rate in the United States ticked up sharply during the height of lock down.


The average person in the United States had a personal savings rate of about 7.2% in December 2019, according to the Kansas City Federal Reserve. Just five months later, in April 2020 at the peak of the lock downs, that percentage skyrocketed to over 33%. Now, however, as consumer spending comes back in full force and consumers have a bit more money in their pockets, that savings rate has plummeted back down.

According to the Bureau of Economic Analysis, those savings rates have come WAY back down. An average savings rate of 6.9% in November 2021 does indicate that people are deploying their "excess" cash, but it also tells me that they may not have much more cash to deploy in the short term. American Express was the direct beneficiary of some remarkable spending during 2021, but questions have to be asked around the sustainability of this consumer behavior. How much longer can the unrestrained spending continue if people are blowing through their savings at historic rates?


Negative Sentiment Around The Platinum Card

Ever since the memestock revolution of 2021, 85% of hedge funds are now using social listening tools to monitor social media and message boards for the next great stock movement. Well what they've been hearing recently is a lot of bitching and moaning about the devolution of the American Express Platinum Card.

The main selling point of the Platinum Card is its travel benefits: 5x points on flights and hotels, the Fine Hotels and Resorts portal, airline credits, etc. Well, these weren't very useful during the pandemic, so American Express had to hard pivot to different perks that included things like a Walmart+ membership and partially subsidized Peacock subscriptions. This led to frustrations from the Platinum Card community, who argued that these new "low value" benefits took away the premium feel of the card and turned it inot a "coupon book." How did American Express respond? They hiked the annual fee from $550 to $695. This (understandably) sent a negative ripple through the consumer base and led to many closing their card. This includes personal finance YouTube megaphone Graham Stephan, who announced in January that he was done with the Platinum Card.


There's also the issue of increased competition at lower price points. Capital One had their scope set directly on the Platinum Card when they released their Venture X card in late 2021. The card offers 80% of the Platinum Card benefits at about half the annual cost, and rewards you each year with bonus miles for keeping the card in your wallet.

capital one venture x credit card
The new Capital One Venture X Card

American Express is in a precarious position with their most popular card, so this is definitely something to watch.


The Bottom Line

American Express is an intriguing company to me because they really do pride themselves on the "luxury" aspect of their products, and they've been really successful. Their merchant fee structure has been incredibly strong so far, and I see the probable continued rebound of travel spend as a huge tailwind for the company. However, I do see one potential issue with the company that gives me brief pause: pricing power.


Pricing power is when a company owns an exclusive product you can't get anywhere else, so they can charge you whatever they want for it. Think about Netflix: they started at a $7 per month fee for their service, which is now $14 thanks to their ability to raise prices. Want to watch "The Queens Gambit" somewhere else? You can't! It's the same with Apple. iPhone's used to cost $200, and now they're $1,000 each because Apple has pricing power.

American Express has very limited pricing power. Is it annoying to have to change all of your auto-pay details if you cancel your American Express card and switch to a Visa card? Sure, but you might do it if they continue to bump the annual fee of the Platinum Card higher and higher. As I also mentioned earlier, their competitors are getting closer to their products too, so you can find many of the same benefits with other card issuers or processing networks for lower annual fees. On the merchant side, you likely don't want to have to cut American Express off of the little sign on your front door that says "we accept these cards:" but you might if the transaction fees become unsustainable.


To me, American Express is an excellent company in the near term thanks to sharp travel spend increases and inflation, but they're going to have to show the ability to evolve and adapt moving forward. The way they've evolved the Platinum Card since the onset of the pandemic has fallen completely flat, and everyone has noticed. Recent reports actually have American Express going in the wrong direction, playing down both cryptocurrency and the Buy Now, Pay Later space in which I think they should be growing into.

UPDATE 2/18/2022: American Express, despite recent reports, is now in the Buy Now, Pay Later space. American Express and Delta Airlines announced on February 18 that they have entered into a BNPL relationship for Delta fares over $100, which constitutes much of their travel business. More to come on this I'm sure in the coming months.


To me, the stock forecast for American Express is:


Short-term: Long

Long-term: Neutral

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