American Express Company Is Nothing to Write Home About
American Express Company (NYSE:AXP) has turned heads over the past two years as the company came back from crushing lows in 2016. The credit card firm lost two of its major partnership deals that year, which halved AXP stock’s value and left many wondering if the firm was on its way out. Just this morning, American Express stock is back over $100 per share and trading at all-time highs — proof that management’s turnaround efforts have been successful.
Now that AXP has climbed out of its 2016 hole, many are wondering whether or not it’s a good time to jump on board. Unfortunately, while AXP’s turnaround story is commendable, it’s likely that the stock’s days of high-growth are over. Instead, American Express stock looks likely to offer investors steady, but lackluster gains over the next few years.
AXP Is Still a Solid Stock
That’s not to say AXP is necessarily a bad investment. The company is actually a very safe bet, appropriate for someone looking for a low-risk investment that will preserve their wealth. Although American Express lost out when its partnerships with Costco Wholesale Corporation (NASDAQ:COST) and JetBlue Airways Corporation (NASDAQ:JBLU) fell apart, the firm has made major strides to ensure that its cards still appeal to customers.
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Amex has significantly improved its reward perks. And the firm has also geared the program toward getting people to use the cards more frequently. This should help the company as more and more transactions become cashless as it will encourage cardholders to choose American Express as their preferred payment method.
Not only that, but the company is likely to see the number of active card users rise as cashless transactions rise. Cash-based transactions are becoming scarce, leaving people to choose between a credit card or a mobile payment. That should be a tailwind for AXP over the next few years. Current customers should use their cards more frequently and new customers should sign up to take advantage of the rewards program.
The Millennial Concern
However, part of the reason AXP wouldn’t be my top pick in the payment processing space is that the firm is likely to struggle to capture the attention of the ever important millennial generation. Right now American Express serves primarily upper-income individuals and the firm’s cards have become somewhat of a status symbol. The company has been successful in making a name for itself in that demographic — surveys show that American Express customers are the most satisfied in the world compared to competitors’.
However, that is unlikely to draw in millennials, which the company will need if it wants to remain relevant over the next decade. Millennials are starting to get wealthier and without them, companies who’ve been successful in the past will struggle. AXP included.
As Luke Lango pointed out — not only are millennials not interested in American Express, they appear not to be interested in credit cards at all. The majority of millennial adults don’t have a credit card and most are not interested in traditional banking. Of course, a world without traditional banking is still pretty far off into the future, but as companies like Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) start to infiltrate the financial industry we might see the AXP start to struggle.
There Are Better Options Than AXP
As I said before, AXP isn’t by any means a terrible investment choice. However, it’s certainly not your best bet in the payment processing space.
Companies like Square Inc. (NYSE:SQ) and Shopfiy Inc. (NYSE:SHOP) are growing at a much faster clip and although there’s more risk attached, their rapidly diversifying platforms mean they’re not overly dangerous bets.
SQ and SHOP are certainly more expensive than AXP with forward P/Es of 113 and 1,411 respectively compared to American Express’ 13. But the firms’ growth trajectories warrant that gap.
Another option is PayPal Holdings Inc. (NASDAQ:PYPL), whose forward P/E of 17 makes it a cheaper option than both SQ and SHOP. But the firm also offers a more promising growth runway than AXP. PayPal already has its foot in the door of several financial services trends like e-commerce and mobile payments. That means the firm will find it easier to transition as fintech expands. And it has a greater appeal to millennials.
The Bottom Line for AXP
American Express is a solid company whose turnaround efforts appear successful. But it’s longer term growth looks shaky and in the near term it’s potential gains are small compared to competitors’.
For investors looking to preserve their wealth, AXP could be a good bet. But for those who can ride out a little volatility there are far better picks in the industry.
As of this writing, Laura Hoy was long AMZN and AAPL.
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