American Express – Great Business, Good Quarter, Less Attractive Price
Q2 reinforces the long-term case, but shares now trade closer to fair value.
Back in April, in a thorough deep dive, I made my case for why I own American Express shares with the intention of holding them for the next decade or two.
As I explained then, American Express has, over its 175-year history, grown into one of the true giants in the payment industry, processing roughly $1.5 trillion in volume annually through its 80 million proprietary cards in circulation and card acceptance across 202 countries.
However, I don’t just view American Express as an industry giant, but as one of the best-positioned players in the industry thanks to its differentiated business model. You see, American Express operates as a closed-loop payments network, issuing its own cards and processing transactions directly, unlike Visa or Mastercard, which only handle processing. This allows it to capture a far larger share of each transaction’s fees and gives it much closer customer relationships and control. Yes, it also assumes the credit risk, but due to its focus on high-income individuals, this risk is very limited.
Furthermore, AmEx generates revenue from card fees (including annual and interest charges), merchant discount fees (a percentage of each transaction), and lending products, providing it with significant revenue diversification. The company does not rely solely on transaction fees; it generates almost half of its revenues from card fees, which are subscription-like fees charged to cardholders in exchange for significant benefits.
You see, through this entire control over the payment flow and the direct relationship with the customer, AmEx is able to offer more generous card benefits and rewards programs, such as Membership Rewards points, travel credits, and luxury perks. This is why most AmEx cards come with a fee for the consumer, somewhat similar to a subscription, creating recurring and highly reliable cash flows, while the model drives high spending and loyalty.
I just love this model and structure. It’s built for durability—sustainable, increasingly reliable, and designed to foster deep customer relationships and retention.
In a world where digital payments are only expanding, American Express’s closed-loop system and premium positioning offer it a long runway for growth. With its unique ability to monetize both sides of the transaction and continuously innovate its offerings, I believe AmEx is not only well-positioned for the coming decades but also likely to extend its lead.
Considering underlying growth in digital transactions and high-income individuals, I believe AmEx should be able to keep delivering at least a high-single-digit revenue CAGR and mid-teens EPS growth well into the next decade.
For long-term investors, this company is a must-own – solid growth, a mega moat, and great durability.
For those of you who missed my April deep dive into American Express, make sure to check it out through the button below!
Meanwhile, last week, American Express released its second-quarter earnings report, which was once again excellent. American Express continued to perform strongly, delivering robust operating and growth metrics across the board, exceeding consensus estimates.
Today, I would like to review all the key Q2 details and developments before updating my view on the shares, financial projections, and target price.
Are shares still a good buy? Let’s make up the balance!
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American Express delivers strong metrics across the board in Q2
On July 18, American Express released its second-quarter results, which showed that it remains a best-in-class company. The company beat consensus estimates on both the top and bottom lines, delivering very strong numbers across the board, showcasing excellent financial health, healthy customer metrics, and continued strong growth, driven by excellent execution.
Honestly, there wasn’t much negative to say about this quarterly report. And yet, shares shed several percentage points in the following trading session on Friday, which was mostly attributed to a miss on core pre-provision net revenue (NNPR). In essence, such a dip in PPNR signals rising costs or weakening margins, reducing the buffer for credit losses and clouding future earnings. Especially with shares arguably priced for perfection, this miss was not well received by investors.
However, this seems like quite an overreaction to me, considering how well AmEx is performing on all other metrics, which showcase its quality and the advantages of its premium customer base. Even as the macro conditions remain weak, AmEx continues to deliver a strong performance across spend, transactions, demand for new cards, retention, and credit, showing absolutely no weakness at all.
Starting at the top, American Express reported Q2 revenue of $17.9 billion, reflecting a 9% YoY increase, which reflects a very stable performance compared to the recent quarter. Most importantly, this signals that AmEx sees no weakness in its overall business, delivering very healthy growth, despite macro concerns.
Under the hood, AmEx saw payment volume growth of 7% YoY in Q2, which is similarly stable compared to recent quarters, as AmEx sees no weakness in consumer spending, which continues to compound at a healthy rate to record quarterly levels.
International volumes remain strong, growing by 12% YoY in Q2, and the number of total transactions was up 9% YoY in Q2, signaling strong customer engagement, which is largely consistent compared to recent quarters.
