Is American Express Stock a Buy?

American Express (AXP -0.23%) released its fourth quarter 2023 financial results not too long ago, and based on the positive market reaction, the numbers were well received. Investors were probably excited about the guidance given.

This momentum partly explains why shares are up 71% over the past three years (as of February 2). This gain far exceeds the 30% increase in S&P500.

Can the good times keep rolling for this top financial stocks? Find out what the bulls and bears are saying about AmEx before determining if it's a smart buying opportunity today.

AmEx is a quality company

Looking back at American Express's latest results, the company reported revenue (net of interest expense) and diluted earnings per share (EPS) of 11% and 27%, respectively, in the fourth quarter on an annual basis. This is a company that continues to post solid gains regardless of the macroeconomic environment.

In 2023, AmEx added 12.2 million net new members, slightly fewer than last year. During the most recent quarter, 32% of the company's payment volume in the United States came from millennials and generation Z, showing how successful the company is in attracting younger customers who could become life members. This group also has the fastest growth in spending.

Management provided an optimistic outlook. They expect revenue to grow between 9% and 11% this year, and diluted EPS is expected to increase 13% to 17%.

The sign of a wonderful business is the presence of an economic gap. Thanks to its power network effects, AmEx's competitive position faces minimal threats of disruption. The company operates a closed-loop system, meaning it not only issues cards to customers, but also leverages the communications channel that merchants use to accept payments. As the number of cardholders increases, the network becomes more valuable to merchants, and vice versa. This positive feedback loop is what makes the company special.

American Express also stands out for its ability to target higher-income customers who typically pose a lower credit risk to the company. Instead of trying to earn primarily interest income on card balances, AmEx is focusing on an expense-centric model. That means most of its revenue comes from people using their cards and annual fees.

Having wealthier card members has led to much lower default rates for AmEx. In the fourth quarter, it recorded a net write-off rate of 2%. To be fair, that number has increased in recent quarters, but it's still below pre-pandemic levels – and it's well below that of other major credit card issuers.

Sectoral and macroeconomic factors

To see the bigger picture, investors also need to understand some reasons why AmEx might not be a good deal. It's always a good idea to know both sides of the story.

To begin with, we cannot ignore the competitive landscape. I explained above how AmEx's network effects protect it in a cut-throat industry. But it's still something that should be on your radar.

When it comes to attracting new cardholders, American Express faces intense competition from companies such as JPMorgan Chase, Bank of AmericaAnd Capital one, to name just three companies. All offer card products with premium rewards and benefits, which may diminish the premium status AmEx is trying to exude.

American Express may target a more affluent customer base, but it remains fully exposed to the macroeconomic environment. Changes in interest rates and inflationary pressures have a profound effect on consumer behavior and spending habits. If a serious recession occurs, the company could see its costs soar. So there is a certain cyclicality here.

Considering all of the above factors, I think the bullish arguments are far more compelling than the bearish arguments. This makes AmEx a fantastic stock to buy right now.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy.

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