American Express (AXP +1.12%) is a top company within the financial services industry that has found lasting success. This has propelled its share price, which has risen 268% in the past decade. Including the dividend, the stock has produced a market-beating total return of 326%.
Should investors buy this leading credit card and payments business while its shares trade just below $300 (as of Feb. 24)? Investors should consider the bull and bear arguments before making a decision that could impact their portfolios.
American Express' wide moat
One of the top reasons investors should consider buying American Express is its wide economic moat. This means the company possesses sustainable competitive strengths that allow it to keep rivals at bay.
One area to pay attention to is Amex's powerful brand, which holds tremendous value in the financial services industry. It offers premium credit cards that often come with high annual fees and impressive perks and rewards, which attracts a more affluent customer base. These people generally have greater spending power, making Amex a partner of choice for various airlines and hotels, for example.
As of Dec. 31, there were 146 million American Express cards active across the globe. These are accepted by about 90 million merchants worldwide. At a high level, this two-sided platform creates a network effect in which more users on each side immediately increase the value Amex provides. This setup is virtually impossible for anyone else to replicate.
Besides the company's durable competitive advantages, investors will also appreciate American Express' growth trajectory. Payment volume and revenue continue to increase at healthy rates. It's worth pointing out that Gen-Z and Millennial consumers are registering faster spending growth than older generations. The business is doing a great job of bringing on these younger consumers, which bodes well for future success as their spending power increases over time.
Generating profits also isn't a problem. The business put up a net profit margin of 15% in 2024. Operating a scaled platform can be very lucrative. What's more, Amex has figured out how to approve customers and take on credit risk in a very profitable manner. This is demonstrated by its industry-leading charge-off rate.
NYSE: AXP
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Investors should be patient
As previously alluded to, American Express is a wonderful business. Even the great Warren Buffett thinks so, as Berkshire Hathaway remains a large shareholder. However, this doesn't mean investors should immediately rush to buy the stock.
There's one clear reason to be bearish right now. That's the valuation.
As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 21.1. This represents a premium to the trailing five- and 10-year averages, and it has climbed notably in the past several months. It's clear that the market has become more bullish on the business, which makes sense given its strong financial performance.
Some investors might not think the valuation is a deal-breaker. After all, this is an outstanding company with a wide moat and impressive long-term revenue and profit growth. That means the stock deserves a closer look at the minimum.
However, I adopt a totally different perspective. My investing strategy centers on finding stocks that I believe can outperform the broader S&P 500 over the next three to five years. To its credit, Amex has done exactly this in the past three and five years.
However, the current valuation looks too rich to me. And this prevents me from wanting to initiate a new position in the stock. Maybe if the P/E multiple contracted toward the mid-teens level, I'd be much more interested in buying shares.
