Last Friday, American Express (NYSE:AXP) reported a solid third quarter that saw revenue hit a record. You wouldn’t know it was a good quarter based on the hideous post-earnings reaction, which saw American Express stock plunge by 5.4% in the ensuing trading session. Indeed, it was an awful day for the entire stock market as investors continued to digest the impact of rising rates and the Fed’s latest words. Still, I view the dip as an overreaction and am staying bullish on the stock.
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Though there was a lot to love about the quarter (most notably “robust” consumer spending and greater uptake from younger customers), there was a bit of hair on the otherwise decent number. For instance, things were looking a tad sluggish on the Commercial side, which saw growth of just 1% year-over-year.
The average consumer is still more than willing to swipe their Amex cards, but not so much for business customers, who actually spent 4.7% less compared to a year ago. Indeed, the macro storm clouds may have already moved in. And that was likely enough to spook investors.
Undoubtedly, Amex’s business customers represent nearly a third of the revenue pie. The sluggishness was a big deal, but did the flat growth in the segment deserve to overshadow the strength in the consumer?
Probably not. It’s no mystery that businesses are incentivized to reign in spending across the board, from the labor force to IT. Business, as we know it, may be slowing. But it won’t be this way forever. The real gold from Amex’s third quarter, I believe, lies in its Consumer business.
Pursuing Younger Consumers is Key to Next-Level Growth
Amex is becoming increasingly relevant among younger consumers, thanks in part to cards that reward cardholders for spending on things like food delivery, video streaming, and ride-hailing. Undoubtedly, if you can get extra points for such categories, you’re going to attract a lot of attention (and business) from people within the Gen Z and Millennial generations, many of whom hold comfort and convenience in high regard.
Indeed, Amex is quite well-known for catering to more affluent consumers, with impressive perks that are the envy of non-Amex cardholders. It’s the wealthy focus that’s the source of the firm’s strength, after all, especially when the economic tides start getting rough. Undoubtedly, most of the wealth is concentrated in the hands of older generations, and these older generations tend to value premium cards that offer extra points and perks in categories they care about.
For instance, Baby Boomer cardholders would probably value airport lounge access, hotel upgrades, and extra savings on gas more than live-event tickets like those offered by Amex’s “Front of The Line” program.
As time goes on, though, more wealth will flow towards younger generations. And Amex is already ahead of the game by beckoning younger customers with rewards and perks that speak to them. In the Canadian market, the Cobalt card offers five times the points on food delivery and three times the points on streaming. In my opinion, such a card has Gen Z and Millennials written all over it. Cobalt is also one of the highest-rated credit cards in Canada, with a perfect five-star rating according to creditcardGenius.
“We see a lot of demand for our products and services coming from Gen Zs and Millennials. They are also signing up for premium products.” said newly-appointed chief financial officer Christophe Le Caillec.
Is AXP Stock a Buy, According to Analysts?
On TipRanks, AXP stock comes in as a Moderate Buy. Out of 13 analyst ratings, there are eight Buys, three Holds, and two Sell recommendations. The average Amex stock price target is $179.38, implying upside potential of 24.2%. Analyst price targets range from a low of $143.00 per share to a high of $201.00 per share.
The Bottom Line on American Express
As other investors fret over the recent results and weakness on the commercial side, I like what I’m hearing from the consumer business from a long-term perspective. Rocky macro conditions should smoothen over time, as should the Commercial business. Meanwhile, Amex seems to be setting itself up for the next generation of growth.
Given the company’s reputation for offering exceptional customer service and top-of-the-line perks, I’d argue that the young customers it brought on amid macro headwinds will be sticking with Amex for a very long time.
Add the firm’s data analytics expertise into the equation, and it seems well-equipped to continue tailoring a product to keep the new, young cardholders it recently brought on for decades. I like what’s in the cards for Amex, especially after the stock’s latest plunge.
