In the past five years, American Express (AXP 0.55%) stock has doubled, climbing 100% (as of Feb. 2). This fantastic gain translates to a roughly 15% compound annual growth rate, a return that outperformed the broader S&P 500.
This credit card issuer and payments network has performed well for investors in the past. But where will American Express be in five years? There are lots of reasons to be optimistic.
Where the business will be
With technological innovation moving faster and faster these days, most recently with the rise of artificial intelligence, investors seem to be overly focused on trying to figure out how things will change in the future. This sounds like a smart tactic, but making predictions is incredibly hard to do accurately. It's better, in my opinion, to direct our attention to what's going to stay the same.
As we look at AmEx five years from now, it's safe to assume that the business will look almost identical to how it operates today. That's not a bad thing. Owning companies that are consistent, durable, and predictable can lead to impressive returns over time. These key traits probably explain why the great Warren Buffett, through his conglomerate Berkshire Hathaway, has a 21% stake in AmEx.
This business will continue to be a dominant card issuer. Thanks to its powerful brand recognition, there is a certain premium status associated with being an AmEx customer. This helps to attract higher-income customers, which results in charge-off rates typically well below peers'.
One trend to keep in mind is the company's strength when it comes to millennial and Gen Z consumers, a group that saw its payment volume in the U.S. rise 15% year over year in fourth-quarter 2023. This was a faster pace than both the Gen X and baby boomer cohorts posted.
"These customers represent over 60% of the new consumer accounts we acquired globally in 2023, and 75% of new consumer platinum and gold accounts acquired in the U.S. came from this cohort," CEO Steve Squeri said on the Q4 2023 earnings call about millennials and Gen Z.
I view this as a largely positive development. Banking relationships seem to be sticky, and the businesses that are able to better target younger age groups could gain long-term financial benefits.
NYSE: AXP
Key Data Points
Can the stock outperform the market?
Just because AmEx's operations aren't likely to change much, it doesn't mean there isn't growth potential. The business reported revenue and diluted earnings per share (EPS) increases of 11% and 27%, respectively, in 2023. And over the long term, management forecasts double-digit gains for both of these headline metrics.
Robust tailwinds continue to propel this company. Personal consumption expenditures, which measures the dollar amount of what people in the U.S. spend for things, increases steadily over time. Inflation plays a role here.
The ongoing war on cash, and proliferation of digital payments, is another trend to be mindful of. Even in a developed economy like the U.S., cash still represents a meaningful portion of the average person's weekly spending behavior. In emerging markets, cash usage is higher. As spending shifts to cards, AmEx can benefit by bringing on more customers who will transact more often, leading to greater revenue potential.
Besides the growth algorithm, the valuation is a critical piece of the puzzle when trying to assess what returns could look like. Shares trade at a price-to-earnings (P/E) ratio of 18.4 today (as of Feb. 2), which is in line with its trailing five-year average. The stock looks reasonably valued today.
Given the potential for mid-teens EPS growth in the future, there is a strong likelihood that the shares will outperform the broader market over the next five years, assuming the P/E multiple remains unchanged.
