It's been a tough year for American Express (AXP 1.74%) investors. While the S&P 500 has gained more than 8% since the end of 2022, shares of the credit card company are up an anemic 2.3% thanks to a sizable sell-off from February's peak. The market's worried about the condition of the economy, which naturally impacts card-based spending.
Just don't come to any sweeping, long-term conclusions about American Express based on the stock's short-term performance. In fact, its shares' recent weakness is a great buying opportunity. This company is not just built to last. It's built to thrive.
American Express does things differently
With nothing more than a passing glance, AmEx looks a lot like any other credit card middleman, such as Visa or Mastercard. And in many regards, it is. It facilitates consumer purchases from merchants and handles all the money/billing matters behind the scenes. The whole charge-card-versus-credit card debate doesn't make much difference these days in terms of acceptance by merchants.
Dig deeper though, and you'll find a distinction between American Express and its rivals like Mastercard and Visa. That difference is the perks ecosystem it offers all of its cardholders.
Take its baseline Blue Cash Preferred card as an example. Its users get 6% cash back on certain grocery purchases and streaming services paid for with the card, as well as 3% cash back on the purchase of select transportation services. They even get 3% cash back on gasoline purchases made in the United States.
The annual cost for access to this card? There isn't one. It's free.
There are upgrades to the Blue Cash Preferred card that do come with an annual fee, though. For $250 per year, Gold cardholders earn huge reward points on card-based purchases at restaurants, as well as on air travel -- points that can be redeemed in a variety of money-saving ways. These users also get a $120 annual credit on certain dining options. Consumers willing to pay $695 per year for an American Express Platinum card get everything Gold cardholders receive and more, including access to more than 1,400 private airport lounges and up to $240 in credit toward streaming services like Disney+, Hulu, and Peacock.
Other card companies also offer cardholder perks, to be clear. But few other credit card middlemen can hold a candle to AmEx's offerings.
And it matters in a big way.
Sidestepping the risks linked to interest rates
Broadly speaking, the banking business -- including credit card lending -- is designed to generate interest-based income. American Express collects its fair share of this type of profit, too.
AmEx, however, also generates a surprising amount of fee-based income that isn't linked to interest rates. In fact, of last fiscal year's $52.9 billion worth of revenue, nearly $43 billion (or 81%) of it wasn't interest income. Of that $43 billion, $30.7 billion was so-called discount revenue, which is fees collected from merchants for accepting American Express credit cards.
Now all the generous cash-back offers make sense. AmEx may well be making even more money on the back end of a transaction.
Another $6 billion of last year's total top line consists of the annual fees paid by cardholders for access to all the perks their particular card offers. Another $4.5 billion of 2022's revenue is categorized as service fees, a big chunk of which are effectively commissions paid by merchants and service providers for steering consumers in their direction.
Data source: American Express. Chart by author. All figures are in billions of dollars.
By credit card company standards, that's an unusually high portion of revenue that isn't solely interest-based, or even transaction-based. This fee revenue also tends to be higher-margin revenue. Most of all though, it's relatively steady and predictable. Although AmEx's discount revenue plunged in 2020 due to the COVID-19 pandemic, for perspective, its card fee revenue actually grew to the tune of 15%, extending an impressive growth streak.
It's the sort of revenue profile plenty of other companies only wish they could have.
A clever twist on a business model with real staying power
Don't read too much into the message. American Express still faces a variety of competitive and macroeconomic threats. Things change over time. No stock is entirely risk-free.
But this company is very, very good at building and managing compelling partnerships with merchants, stores, and other service providers. It's also just as good at convincing consumers (as well as its corporate customers) that its perks are powerful enough to justify an annual cardholder fee; not too many other card companies are able to charge a yearly fee of nearly $700 and get away with it.
These fees and perks, of course, fuel their own ongoing growth.
So, take the hint. As long as people have a reason for discretionary or even just practical spending, AmEx will have a revenue-generating market to serve. The stock's recent price lull is a window of opportunity.
