American Express (NYSE: AXP) has generated a 102% total return in the past five years. It's worth highlighting that this gain is better than that of the S&P 500 index.
But as of this writing, the financial stock trades 6% off its all-time high. It might be a good idea to buy the dip.
Before you do that, take into account the top bull and bear arguments for American Express.
Amex bull case
American Express possesses a top brand in the financial services sector. And this helps explain its success. The company's cards, like the Centurion, Platinum, and Gold offerings, carry high annual fees that naturally draw in an affluent customer base that can spend more. Given that Amex cards have top-notch rewards that these customers find valuable, the business has historically been able to raise its card fees, which hasn't deterred growth.
Moreover, these higher-income consumers make Amex a less risky stock to own. The company's default rates are consistently lower than other credit card issuers', which results in fewer losses.
Similarly to Visa and Mastercard, American Express operates a payment platform. It has 144 million cards that are accepted by tens of millions of merchants. This creates powerful network effects. Merchants want Amex cardholders as their customers, so they find tremendous value in accepting these cards as a method of payment. In addition to the benefits gained, cardholders have greater utility with more places to spend.
Another prominent bull case centers on American Express' fantastic financial performance. Between 2013 and 2023, revenue increased by 84%, with diluted earnings per share (EPS) soaring 130% during the same time.
The momentum has carried over into this year, even though there is ongoing economic uncertainty. Executives predict revenue and EPS to rise double-digit percentages this year. Growth is being driven by strong international activity, as well as new cardmembers, particularly younger ones.
Amex bear case
As is the case with any business in this industry, an unfavorable factor is just how competitive the financial services sector more broadly -- and the credit card space more specifically -- truly is. Amex has a powerful position in the market, but there are other options out there.
JPMorgan Chase, with its Sapphire Reserve offering, as well as Capital One and its Venture X card, give the American Express Platinum Card a run for its money. Competition, to secure valuable partnerships to attract customers, will remain fierce.
While Amex has put up a solid financial performance, the business does deal with some cyclicality. This is common for companies that lend money and that depend on robust consumer spending for their success. It's hard to deny that in a severe recession, Amex would be hurt.
Depending on how much you prioritize it, the valuation could be another bear argument. Shares trade at a price-to-earnings ratio (P/E) of 17.7 right now. This is in line with Amex's trailing-10-year average of 17.9. Of course, all else equal, investors would prefer a lower valuation multiple, as it adds upside. The current P/E ratio reduces the margin of safety.
Is American Express stock a buy?
Both the bull and bear cases undoubtedly are compelling. For investors, understanding both sides of the argument for any business that's on your radar or in your portfolio is critical. And Amex is no different.
I still view this stock as a worthy investment candidate. Shares appear fully valued, but the company's quality speaks for itself.
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American Express is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase 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 has positions in and recommends JPMorgan Chase, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
