Investors trying to find winning stocks might want to look at businesses that have done well in the past. The belief is that successful companies can continue their run in the future. Since mid-January 2020, American Express (AXP +1.89%) has produced a total return of 146% for its investors, which meaningfully outpaces the broader S&P 500. But where will this top financial stock be in five years?
Steady growth trajectory
Looking to 2030, I don't believe American Express' operations are going to change. It will still run a closed-loop payments network and offer credit cards and other banking services to individual consumers and business clients.
Investors can expect steady and predictable growth from Amex, as has been the case in the past. The business benefits not only from the rise of cashless transactions, but also greater spending that happens across the economy. Five years from now, it's a virtual certainty, in my opinion, that Amex will have more active cards in service than it does today. And it will be handling more payment volume.
This will undoubtedly lead to higher revenue. In the past five years, between Q3 2019 and Q3 2024, sales were up 51%. Maybe it's reasonable to expect a slowdown. But Wall Street analysts call for the top line to grow 8% in 2025 and 2026. I believe high-single-digit gains are in the right ballpark over the long term.
NYSE: AXP
Key Data Points
Partnerships are important
Revenue growth will be boosted by compelling partnerships, which are key to any major credit card issuer's success. They incentivize consumers to not only sign up for, but frequently use, a particular credit card to maximize the points and benefits they could earn. This increases the value for cardholders.
American Express has notable partnerships in place with Delta Air Lines, Hilton Hotels, and Uber Technologies. Investors shouldn't be surprised if there are some changes here, as competition from other card issuers, like JPMorgan Chase or Capital One, can lead to difficult renewal negotiations. This is precisely what happened about nine years ago, when Amex was unable to renew a 16-year partnership it had with Costco Wholesale.
American Express' brand caters to an affluent customer base that has tremendous spending power, so it definitely has some negotiating leverage with hotels, airlines, and other companies that want to tap a lucrative revenue source. This alleviates the risk, probably making Amex a partner of choice.
Valuation driving returns
Five years ago, shares of American Express traded at a price-to-earnings (P/E) ratio of 16. Thanks to the stock's impressive run, it can now be purchased for a P/E multiple of just under 22. Seeing a 37% rise in the valuation makes sense, given the company's strong financial performance and the overall market's historically high returns.
But does the current valuation represent a bargain today? I don't think it does. The P/E ratio is close to its most expensive level in the past three years.
Expectations have risen, as the market has adopted bullish and optimistic sentiment toward the business. This is evident when you realize that shares are up 100% in just the past 15 months. Perhaps the market has already priced in the prospects of lower interest rates and a more robust economic backdrop in 2025.
However, I still think the stock should be on your watch list. Yes, the valuation is more elevated than it was five years ago. But this is a high-quality enterprise that deserves a premium P/E multiple when compared to traditional banking entities.
To be clear, I don't believe American Express will produce the kinds of returns it did in the past five years. Valuation remains a concern for me, so maybe investors should dollar-cost average over time to acquire a stake in this outstanding company.
