The credit card and payments company American Express (AXP 0.56%) has been a great stock for quite a while now, and trades at a premium valuation.
But no matter how successful a company is, the market is always going to raise an eyebrow when investors see expenses materially increasing, because that cuts into profits. AmEx has been ramping up expenses in recent years to drive its new strategy and build scale. So far, those expenses seem to be well worth it, with the company providing excellent guidance for the year.
But investors will be monitoring the situation closely to ensure that those expenses translate into good longer-term results, which is why the next few years will be crucial for the company.
Image source: Getty Images.
Where have the expenses gone?
Over the past few years, American Express has spent heavily to attract a "high-spending, highly engaged premium customer base." A lot of these new customers are millennials and Gen Z; they spend more heavily across AmEx's payments network, have better credit quality, and help build out AmEx's ecosystem even more.
"These premium customers attract a growing network of merchants and partners who add more value to our membership model, which in turn enables us to attract more premium customers who attract more merchants and partners, which creates more scale," AmEx's CEO Steve Squeri explained on the most recent earnings call.
In 2022, AmEx's total expenses rose 24% year over year. Operating expenses are also up 24% year over year. Marketing expenses to acquire new members were only up 3% in 2022, but that's after jumping 43% in 2021. The company has also seen a big jump in spending on card member services for things such as customer engagement.
The results have been impressive
So far, the expenses seem to have paid off. AmEx has acquired 12.5 million new card members over the last year, and 70% of its card members are enrolled in a fee-based card product that generates annual recurring revenue. Millennial and Gen Z customers made up more than 60% of new card members.
Credit quality at AmEx has also been incredibly strong. With high inflation and people having spent their built-up savings from the pandemic and from stimulus payments, banks and credit card companies are starting to see higher delinquencies and loss rates. But net loss rates on credit card loans and delinquencies are still way below pre-pandemic levels, and management expects them to stay below this level throughout 2023.
The company also provided really strong guidance for the year: for revenue to grow 15% to 17%, well above Wall Street's expectations, and for earnings per share of $11 to $11.40, which would be about 10.5% higher than 2022 at the low end of that guidance.
Can the company keep it going?
After heavy spending over the last two years, AmEx is now planning to cut back the growth in expenses and start realizing efficiencies from those investments. It expects operating expenses this year to only rise by about 2%, and marketing expenses to grow very minimally as well.
Management is confident in this outlook because they believe they have achieved a scale where they can not only hit their return targets in 2023, but also generate revenue growth of 10% or more in 2024 and beyond, as well as earnings growth in the mid-teens.
It will be critical for AmEx to hit these targets over the next few years and to generate solid results over the next three to five years, without relying too heavily on expense growth to show that the investments were worth it. AmEx has a long track record of great performance, so there's no reason to think the company won't succeed. But it's made a big investment, and now investors will want to see the payoff.
