Expanding Customer Base and Premium Brand
While American Express charges an annual fee for its credit cards, it primarily generates revenue from credit card transactions. Merchants pay a small fee to American Express for processing customers’ payments. In 2023, customers spent close to $1.5 trillion on the American Express card network, resulting in $33.4 billion in transaction revenue, accounting for 55% of the company’s consolidated revenue.
Notably, American Express has been gaining traction among younger millennial and Gen Z customers, adding around 3 million new cards to its network each quarter since the start of 2022. Transaction revenue from these age groups grew by 15% year over year in Q4 2023. Despite competition from big banks and other credit card issuers, American Express’s decades-long brand recognition in the United States makes it challenging for competitors to undermine its position in the minds of consumers.
Expanding International Distribution
American Express’s lack of distribution compared to rivals Visa and Mastercard was a hindrance ten years ago. However, the company has made significant strides in this area. In 2014, its merchant acceptance rate in the United States stood at 80%, but it has since grown to 99%. This improved acceptance rate enhances the value proposition for customers and has contributed to the growth of transaction revenue over the past decade. American Express is specifically focused on increasing acceptance in major cities with high spending, including London and Singapore. In 2021, 17 of these priority cities had a merchant acceptance rate greater than 75%.
Expanding international acceptance provides opportunities for American Express to increase spending among American travelers abroad and attract customers from new markets such as the United Kingdom, Australia, and Japan. This strategic development will be crucial as American Express seeks to continue growing its network’s spending over the next five to ten years, considering its already significant presence in the United States.
All-Time High Stock Price and Attractive Valuation
Following impressive earnings reports, American Express’ stock price reached an all-time high of $202. This year, the stock has delivered a 7.5% return, surpassing the performance of the S&P 500.
For 2024, management anticipates earnings per share (EPS) of around $13, resulting in a forward price-to-earnings ratio (P/E) of 15.5. With steady revenue growth, margin expansion, and ongoing share repurchases, American Express aims to achieve mid-teens EPS growth annually. Considering its low P/E ratio, American Express is well-positioned to outperform the market in 2024 and over the next decade.