Where Will American Express Stock Be in 3 Years?

American Express' (AXP -0.53%) stock has rallied nearly 60% over the past three years as the S&P 500 advanced just over 20%. The financial services giant outperformed the market as it continued generating stable growth in a tough macro environment. But will this blue chip stalwart stay ahead of the market over the next three years? Let's review its business model, growth rates, and valuations to decide.

How American Express differs from Visa and Mastercard

American Express controls a much smaller slice of the global card processing market than Visa and Mastercard, but it operates a different business model. Visa and Mastercard only operate payment processing networks and don't issue any cards. Banks and other financial institutions issue co-branded cards with Visa and Mastercard, take on the customers' debt, and pay the two companies "swipe fees" for accessing their payment networks.

Image source: Getty Images.

American Express is both a payment processor and a card issuer. It's one of the largest banks in America by total assets and backs its cards with its own balance sheet. That's why it's much harder to get an American Express card than a co-branded Visa or Mastercard. Amex's prioritization of high credit scores makes its cards status symbols of financial success, but it also limits its own customer base. As a result, many businesses -- especially overseas ones -- still don't accept Amex cards.

How did American Express fare over the past three years?

American Express suffered a major slowdown in 2021 as the pandemic throttled consumer spending throughout most of the year. But its business quickly recovered over the following two years as those headwinds dissipated. It also consistently reduced its number of outstanding shares throughout that choppy slowdown and recovery.

Data source: American Express. EPS = earnings per share.

For 2024, it expects its revenue to rise 9% to 11% as its EPS grows 19% to 23%. It attributes that growth to its continued recovery in the U.S. consumer market, which is being led by Gen Z and millennial shoppers, and its ongoing international expansion. Its focus on higher-income consumers also likely insulated it from the inflationary headwinds, and it recently divested its fraud prevention firm Accertify to raise more cash and streamline its business.

American Express is still growing, but it maintained a low delinquency rate with just 1.2% of its card member loans over 30 days past due at the end of the second quarter. That's lower than its average pre-pandemic delinquency rate of 1.5%.

So what will happen to American Express over the next three years?

From 2023 to 2026, analysts expect American Express' revenue to grow at a compound annual growth rate (CAGR) of 9% as its EPS increases at a CAGR of 15%. That growth should be driven by the improving macro environment. It should also continue to buy back more shares and raise its dividend, which currently has a forward yield of 1.1%.

Assuming American Express matches analysts' estimates, grows its EPS by another 15% in 2027, and still trades at 17 times forward earnings, its stock price could easily rise more than 30% to the low $330s over the next three years.

That means American Express' stock would likely either match or beat the S&P 500 -- which has generated an average annual return of about 10% over the past 30 years. That's probably why Warren Buffett's Berkshire Hathaway still holds American Express stock as its second-largest position after Apple.