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American Express (NYSE:AXP) has been on an aggressive marketing push recently, trying to get more folks to use their products and services. While Visa (V), American Express and Mastercard (MA) hold around 80% of the world’s credit card balances, American Express holds steady at around 20% and hasn’t really budged in the last few years.
Credit Card Market Share (UpgradedPoints.com, SEC Filings)
To try and counter this stagnant or often times decline in market share, the company put out an aggressive marketing push by promoting new features in their core credit offerings like revamping their Gold and Platinum offerings and including hundreds of dollars’ worth of perks with third party merchants.
But as we get updated interest income and margin figures from the company, it’s quite evident that these efforts have flopped and that the company’s market share has remained the same and in some categories even fell further.
While this may not inherently be a bad thing for a long term investment since the worlds credit card usage is going nowhere but up, the company’s costs have risen substantially in order for them to offer these services and perks.
I’m not sure that the company is a good investment, let’s dive in.
The American Express Way
American Express is known for one thing in the credit card processing world – it has higher fees for merchants. Companies like Visa and Mastercard charge between 1.5% and 2.5% in processing fee to merchants around the world, but American Express charged somewhere between 2.5% and 3.5%, leading to many merchants and stores around the world not accepting American Express while some others charge you a little extra to cover that cost.
To try and overcome this, the company has tried to attract higher spending individuals, as well as gear their products toward those who seek to get better points and other benefits through their cards. They subsequently rebranded their Gold and Platinum offerings, which now offer a substantial amount of perks and rewards for its users for a hefty but worthwhile annual fee.
But as a result. the company has reported significantly higher costs associated with fulfilling those perks, which has dampened their overall margins. This isn’t to say that the company hasn’t experienced growth in total revenues and income as a result of these rebranding, but it’s a mixed blessing.
Here’s an easy way to see this, looking at the company’s cost of services provided as a percentage of their overall revenues over the past few years.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Cost/Rev | 48.9% | 49.5% | 51.1% | 50.4% | 54.0% |
(Source: Company Income Statement – Seeking Alpha AXP Page)
Revenues Are Increasing – But For How Long?
The reason it’s a mixed blessing is twofold.
1) The company will now have a difficult time cost cutting. With the ease of getting approved for multiple credit cards, even without a superior credit rating, if perks are lowered, it’s easier than ever for customers to simply move on to another credit card and leave American Express. This means that the company, at least for now, is ‘stuck’ with paying for these perks.
2) A somewhat overlooked issue is that the company’s gearing their cards towards folks who take full advantage of the perks is that they rarely carry over a balance on their cards, meaning that fee and interest growth is kept to a minimum. Now, the company offers a wide variety of products through a lot of issuing third party companies, but the heavy marketing push and perk increases are where the growth can be dampened in the longer run.
Revenue growth has been relatively good over the past few years, and this investment theory doesn’t discount that, but there is a caveat to looking head and determining if the company can be a long term investment.
Underperforming Peers Set To Continue
As of now, I believe American Express will continue to underperform peers and lose some market share as a result. Here’s a look at how analysts project the company’s revenues to compare with peers Visa and Mastercard:
| 2023 | 2024 | 2025 | |
| AXP | +15.9% | +9.01% | +8.79% |
| V | +11.0% | +11.1% | +11.6% |
| MA | +13.2% | +13.8% | +13.8% |
(Source: Seeking Alpha Earnings Projection – AXP | V | MA )
As we can see from these figures, it’s not only that American Express is projected to underperform its peers, but it’s also forecast to report declining revenue growth rates while its peers are expected to report some acceleration.
However, that’s not all – American Express is also underperforming its peers when it comes to net income as the aforementioned factors of higher perk payout, lower fee structure and the likes hit their bottom line. I believe this will continue, as we can see by analyst EPS projections for the coming 3 years:
| 2023 | 2024 | 2025 | |
| AXP | +12.3% | +11.8% | +13.3% |
| V | +14.5% | +13.9% | +15.5% |
| MA | +14.9% | +18.5% | +18.6% |
(Source: Seeking Alpha Earnings Projection – AXP | V | MA )
On the balance sheet front, there’s also little difference between the company and its peers. They all have a substantial amount of cash at around $40 billion, as well as long term debt of around $43 billion, which boosts their interest expense. American Express does still have some room to cut costs by shrinking some of their staff, but nothing more than other companies in the sector can or already have been doing.
Is There Anything Worthwhile Going On For American Express?
While American Express may slightly outperform the broader market, which as a historical 7% annual return rate, it certainly isn’t set to outperform its immediate peers, so anyone who is looking for an industry-beating investment can look to American Express’s peers Visa or Mastercard.
I do expect the company to continue to spend heavily on marketing and offering higher perks for their top credit cards, which I believe will further hurt their ability to drive higher margins.
Moreover, there has also been a push lately to put a cap on credit card interest rates, which American Express actually has some of the highest of. Credit unions already have card interest rates capped at 18%, which if a similar law is enacted can have a significant impact on American Express.
A slight bright spot is that the company pays an annual dividend yielding 1.44%, which is higher than both Visa and Mastercard, combined. Even so, that doesn’t quite make up for the growth differential.
Thesis Conclusion: I’m Not A Fan
In the past few quarters, I was wondering what the company’s marketing push would do to tackle the peer underperformance of the American Express brand. Overall, while it made a lot of headlines online and elsewhere and seemingly did bring in some new customers, I don’t believe it was a net benefit to the company’s growth prospects.
Not only are they paying higher costs associated with perks they offer, but given that these card users tend to not carry over a balance (where it’s even applicable), they’re not getting much in return outside of transaction fees. Those same transaction fees, while higher than competitors, also come down a bit with the perks of cash back or points and others.
Moreover, not only has the company not shown any meaningful growth in market share, future revenue and EPS projections suggest they will further lose market share to others in the industry like Visa and Mastercard.
There are plenty of firms, I believe, which can provide good exposure to a higher spending environment, higher interest rates and the likes, but American Express is not one of them. Not only that, but I think American Express will ultimately underperform both peers and the overall market due to higher expenses they won’t be able to take back without losing customers.
While the company has already pulled back a bit and is trading at a lower multiple than peers, I have turned neutral on American Express and will not initiate a position as I previously thought of doing.
