American Express Stock: Bull vs. Bear

In the past five years, American Express (NYSE: AXP) has generated a total return of 107% (as of July 24). This means that owning the business would've more than doubled your money. That's a fantastic outcome.

This financial stock has performed remarkably well more recently, rising 65% since the start of last November. But before you buy shares in the hopes of riding the momentum, take a step back, and learn the key bull and bear cases for American Express.

The bull case

One of the most noticeable reasons investors would want to own this business is Amex's solid financial performance. You would think that high interest rates and inflationary pressures, as well as worries about a possible recession, would hurt this company. But that hasn't been the case.

During the first six months of 2024, American Express reported revenue growth of 8%. In this same period, adjusted earnings per share soared 21%. Executives expect the top and bottom lines to be up double digits for the full year.

Another bull argument for this business is the presence of a wide economic moat. American Express positions itself as a premium card issuer, with products that cost high annual fees, but that come with top-notch rewards and perks. This attracts a wealthier client base, which results in lower defaults (compared to rivals) and higher spending. Moreover, Amex can bring on valuable partnerships, including with Delta Air Lines , Marriott , and Uber , because these companies realize the spending power of Amex cardholders.

Since the business operates its own payments platform, Amex also benefits from powerful network effects . As it attracts more cardholders, the platform immediately becomes more valuable to merchants because there are more potential customers. And with more merchant acceptance locations, cardholders have more places to shop.

I don't believe the importance of the company's network effects can be overstated. This is what protects Amex's competitive positioning in the industry. It would be next to impossible for someone to try to start a rival platform from scratch. They'd have to sign up customers and merchants without any utility to either stakeholder. This gives me confidence that American Express won't be disrupted anytime soon.

The bear case

Of course, no business is perfect. Even with an industry leader like American Express, investors should know about the bear case.

One notable risk this company faces is that it's a card issuer, funding the purchases of its customers. Similar to a typical bank, Amex's operations can be cyclical. When there's a recession , defaults could rise. In fact, the company's net charge-off rate of 2.1% in the second quarter was meaningfully higher than the 1.8% posted in the year-ago period. Perhaps this trend is a sign that tougher times are on the horizon.

Since American Express takes on credit risk and isn't just a payment network, it probably won't ever command the same valuation multiple that rivals like Visa and Mastercard have. These two card giants trade at an average price-to-earnings (P/E) ratio of 31, while Amex shares sell at a P/E multiple of 18.

Another bear argument deals with the overall industry. Financial services is one of the most cutthroat sectors of the economy. When offerings are largely commoditized, it makes it that much more difficult to stand out. Consequently, American Express will have to put all its efforts behind maintaining its positioning, whether that's with its annual fee strategy or with compelling perks and rewards, to continue growing its card member base. That won't be easy with other successful premium credit cards on the market.

Investors eyeing this stock as a potential opportunity should now have a more thorough understanding of both sides of the argument with American Express.

Before you buy stock in American Express, consider this: