We recently compiled a list of the 10 Best Credit Card Stocks to Buy Now. In this article, we are going to take a look at where American Express Company (NYSE:AXP) stands against the other credit card stocks.
The market for credit card issuance services has expanded significantly over the last several years. At a CAGR of 9.2%, it will grow from $478.09 billion in 2023 to $522.22 billion in 2024, according to the Business Research Company. Over the coming years, a significant expansion in the market size for credit card issuance services is anticipated. At a CAGR of 8.3%, it will increase to $717.7 billion in 2028, as per the research. Contactless payment usage, data security concerns, cryptocurrency emergence, embedded finance, customization, and personalization are all factors contributing to the growth in the projection period.
The credit card market is still changing, mirroring changes in customer preferences and general economic conditions. According to the Q4 2023 Quarterly Credit Industry Insights Report (CIIR), the average credit card debt per borrower at the end of 2023 was $6,360, a 10% rise YoY. This resulted in a total of $1.13 trillion in credit card debt in the United States the same year. Moreover, the average amount owed by households in the 90th percentile is $11,210, with higher-income households often having larger loads.
According to TransUnion, credit card usage continues to rise, with 167.2 million users expected by mid-2023, representing a substantial rise over the last three years. Furthermore, according to the Federal Reserve Bank of San Francisco, credit cards accounted for 31% of all payments in 2022, although less than 10% of Americans typically utilized cash, according to a December 2023 Forbes Advisor survey.
As per the Federal Reserve Board, credit card delinquency rates have been rising gradually and will reach 3.1% by the end of 2023, the highest level since 2011. Additionally, charge-offs rose in Q2 2024 from 4.16% to 4.38%, a record high of 12.5 years that hasn’t been seen since Q4 2011. Meanwhile, according to Forbes Advisor, the average credit card interest rate in March 2024 was 27.89%, putting financial strain on people with balances.
In the future, digital payment methods are expected to gain popularity; according to a survey conducted in August 2023, more than half of customers preferred digital wallets over traditional cards. This change shows that credit card companies will continue to innovate, even as concerns about interest rates and debt levels persist.
Overall, as we have also mentioned in our article, “7 Best American Bank Stocks To Buy According to Hedge Funds,” the U.S. market for digital banking platforms was estimated at $1.04 billion in 2024 and is projected to grow at a CAGR of 9.63% to reach $2.04 billion by 2031.
Looking forward, according to a report, credit card spending is predicted to increase in the mid-single digits by 2024, while balances will fall to the mid-to-high single digits after a substantial rise since 2022. If labor markets are steady, credit performance measures are expected to decline during 2024 and stabilize by early 2025. Despite lower inflation, key problems include resumed student debt payments, high interest rates, and growing living costs.
Yanni Koulouriotis, CFA, Vice President – Global FIG stated:
“Overall, DBRS Morningstar expects a less favorable operating environment for credit card issuers in 2024 as consumer dynamics shift and are less of tailwind to credit card issuer performance. While we expect weaker financial performance in 2024 compared to 2023, we still expect performance to be supportive of current credit ratings.”
Methodology:
We sifted through holdings of credit card ETFs and online rankings to form an initial list of 20 credit card stocks. Then we selected the 10 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. We have used the stock’s market cap as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A close-up view of a payment terminal, capturing the sophistication of a payment network.
American Express Company (NYSE:AXP)
Number of Hedge Fund Investors: 68
Market Cap as of September 9: 173.51 billion
American Express Company (NYSE:AXP) is a multinational financial company that offers charge and credit card payment solutions to both consumers and businesses. It is the second largest card issuer behind JPMorgan, with over 112 million cards in circulation worldwide.
The firm is present in roughly 130 countries. Additionally, the business runs a very successful merchant payment network. It has been in business since 2018 and includes three segments: global merchant and network services, global consumer services, and global commercial services. The company’s commercial division provides business loans, consultancy services, and spending management systems in addition to payment products.
For a number of years, the company has experienced rapid expansion as record numbers of new cards have been acquired by the firm due to growing momentum with younger demographics and a recovery in travel and entertainment expenditure, which has increased payment volume. Net interest income increased by more than 69% between 2021 and 2023, revealing that AXP’s move to a younger cardholder base has also contributed to notable loan growth. Nevertheless, noninterest income still accounts for more than 75% of the firm’s total revenue, with the discount rate that the company charges retailers for accepting payments being its main revenue stream. This implies that the amount of money that consumers spend directly affects the income of the business.
With 9% YoY revenue growth propelled by robust performance across all categories, the company reported an outstanding EPS of $4.15, surpassing estimates of $3.26. The company’s long-term performance is supported by its premium customer base and 24 quarters of double-digit growth in card fee revenue.
Here is what Artisan Select Equity Fund said about American Express Company (NYSE:AXP), in its first quarter 2024 investor letter:
“American Express Company (NYSE:AXP) shares rose 22% this quarter. This is an interesting case study, given our earlier discussion about inflation. American Express operates one of the largest credit card networks in the world. Its revenue is primarily a function of a fee rate applied to the dollar value of goods and services that are transacted through its network. That dollar value is, of course, nominal. As inflation pushes up the value of those goods and services as it has for the past few years, American Express will capture that value through its fee structure. The past few years’ inflation has clearly been a benefit. Aside from its inherent inflation protection, the business is a very strong one. Payments continue to shift toward electronic forms, benefiting American Express. It also has a strong brand that attracts loyal and highly profitable customers that are the envy of the industry. Recent results have been strong with revenues moving nicely ahead of GDP.
While Berkshire owns $34.52 billion worth of stakes in American Express Company (NYSE:AXP), out of the more than 900 hedge funds tracked by Insider Monkey, 66 hedge funds reported owning stakes.”
Warren Buffett’s Berkshire Hathaway is the largest shareholder in the company, with 151,610,700 shares worth $35.11 billion.
Overall AXP ranks 7th on our list of the best credit card stocks to buy. While we acknowledge the potential of AXP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AXP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
