The American Express Company (NYSE: AXP) appears to be shrinking before our eyes.
The number of American Express cards outside the United States fell from 62.8 million in 2017 to 58.2 million in 2020, Statista estimates. Similarly, the number of American cards in the US fell from 54.7 million in 2019 to 53.8 million in 2020. Conversely, the number of Amex cards in the United States rose from 47.5 million in 2016 and 50 million in 2017.
I calculate the total number of American Express (AXP) cards on Earth fell from 112.8 million in 2017 to 112 million in 2020. I base my calculation on the numbers provided by Statista.
Thus, American Express is issuing fewer cards than four years ago. The company’s market is shrinking before our eyes.
Does Mr. Market Overvalue American Express (AXP)?
Predictably, many people will wonder if Mr. Market overvalues Amex (AXP). Notably, Mr. Market paid $168.87 for American Express on 20 July 2021.
Furthermore, American Express’s share price rose from $94 on 20 July 2020 as the number of cardholders shrank. Cynics will say investors are ignoring American Express’s shrinkage.
The financial numbers show that shrinkage goes beyond cardholder loss. For example, Amex’s quarterly revenues fell from $11.026 billion on 31 March 2020 to $9.426 billion on 31 March 2021.
Moreover, Stockrow estimates American Express’s revenues fell by -14.51% in the quarter ending on 31 March 2021. In addition, Amex experienced five straight quarters of revenue shrinkage during the pandemic year.
Stockrow estimates the revenues shrank by -2.07% in the quarter ending on 31 March 2020, -29.94% in the quarter ending on 30 June 2020, -22.46% in the quarter ending on 30 September 2020, and -19.93% on 31 December 2020.
Is American Express losing money?
Thus, American Express (NYSE: AXP) is shrinking before our eyes but how much money does it make or lose?
Amex loses money. Notably, American Express’s quarterly gross profit fell from $10.31 billion on 31 March 2020 to $9.064 billion on 31 March 2021. Conversely, the quarterly operating income rose from $452 million on 31 March 2020 to $2.993 billion on 31 March 2021.
In contrast, American Express’s quarterly operating cash flow rose from -$2.219 billion on 31 March 2020 to $2.28 billion on 31 March 2021. Similarly, the quarterly ending cash flow rose from $38.608 billion on 31 March 2020 to $40.28 billion on 31 March 2021.
Thus, Amex is making more money and generating enormous amounts of cash. In addition, American Express does not have to borrow much money. American Express reported a quarterly financing cash flow of $461 million on 31 March 2021 that rose from -$5.418 billion on 31 March 2020.
What Value does American Express have?
Thus, American Express (AXP) finished the first year of the pandemic with more cash and less debt. Yet, Statista shows American Express finished the pandemic year with fewer cardholders.
In contrast, Amex’s total assets rose from $186.06 billion on 31 March 2020 to $193.067 billion on 31 March 2021. Thus, American Express seems to have more value as it loses cardholders.
Skeptics will wonder how American Express can retain value with fewer cardholders? After all American Express makes money by issuing cards and charging transaction fees.
Logic dictates that with fewer cardholders there will be fewer transaction and membership fees. The transaction and memberships are Amex’s revenue source.
I think the amount of fees American Express collects is falling because its revenues are lower. Notably, the quarterly revenues fell from $11.026 billion to $9.426 billion between 31 March 2020 and 31 March 2021.
I think the amount of fees American Express collects is falling because its revenues are lower. Notably, the quarterly revenues fell from $11.026 billion to $9.426 billion between 31 March 2020 and 31 March 2021.
Why is American Express Shrinking?
I think American Express (AXP) is shrinking because of changes in the card market and COVID-19.
COVID-19 cut demand for Amex cards by shutting down international travel and business travel. The pandemic closed brick and mortar stores around the globe which led to less need for American Express cards.
However, Statista’s number show American Express was shrinking before COVID-19. For example, the number of American Express cards outside the US peaked at 62.8 million in 2017, three years before the pandemic. conversely, the number of Amex cards in the USA peaked at 54.7 million in 2019.
Thus, both COVID-19 and a changing credit credit market are hurting American. I think demand for American Express is falling because competitors are comparable cards.
Is the American Express Card Irrelevant?
In particular, the Chase Sapphire Card . One enormous advantage the Sapphire has is that is a Visa (V) card. You can use Visa in many places that do not accept American Express.
Another advantage is that Sapphire offers bonus 100,000 bonus points for those who make $4,000 worth of purchases in the first three months. Hence, American Express cards no longer offer the advantages they once did.
Consequently, many people are eliminating additional credit cards and using just one or two cards. Notably, many people make most of their purchases online. Hence, they only need one card.
Similarly, many people use just the card in their Apple Pay or Google Pay. Hence, there is no need for extra plastic in their wallet. In addition, fewer people carry the American Excess card just to impress others.
Remember, the modern American status symbol is an elaborate smartphone not flashy credit cards. Today’s upwardly mobile American wants to impress the gang at the office with the latest phone, not the crowd at the country club.
Moreover, today’s salesperson meets her customers through Zoom (ZOOM) hence she has no need of an Amex card to buy lunch for prospects. Hence, I can argue that the American Express Card is irrelevant in 21st Century America.
Is American Express a Good Stock
Contrarians, however, will argue that American Express (AXP) is an excellent company with a growing share price that makes money.
Amex pays an impressive dividend, for instance. American Express shares will pay a 43₵ quarterly dividend on 10 August 2021. Overall, Amex offered a $1.72 Forward Annualized Dividend and a 1.01% dividend yield on 20 July 2021.
In conclusion, I think investors need to watch American Express because it shows how Mr. Market overprices US stocks. I advise investors to avoid Amex because Mr. Market overprices it. However, Amex could be a value investment if its share price falls to a realistic level.
Originally published at https://marketmadhouse.com on July 20, 2021.
