Not too long ago, the American Express (NYSE:AXP) Centurion card, colloquially known as the ‘Amex Black Card,’ was rapped about by the likes of Kanye West and touted as being representative of the height of sophistication. Luxury and glamour oozed from the mere mention of the black card, details of which American Express’s marketing department made sure to cloak in exclusivity. In a time when not even government secrets are safe, it’s unsurprisingly that details have leaked out, but millennials seem indifferent and just swipe left.
The problem is that opera tickets and special access to similar highbrow events hold less allure for the highly sought-after millennials who have decades of spending ahead of them. Former American Express executives have jumped ship to other credit card companies, notably Chase, and are giving their former employer a real run for its money. This among other threats to their traditional customer base, no doubt, keeps American Express executives up at night.
After a valiant post-financial crisis run until 2015, American Express lost its cash cows of many years (approximately $80 billion in billed business at the time), Costco Wholesale Corporation (NASDAQ:COST), and JetBlue Airways Corporation (NASDAQ:JBLU) in quick succession. The stock was down 25% that year.
Longtime American Express shareholder, Warren Buffett of Berkshire Hathaway (NYSE:BRK.A) fame, came out defending his ownership of AXP and the fundamental strength of the business. Charlie Munger however, did reveal some concern, admitting that the future of payments to be uncertain. Nonetheless, AXP has rallied since the end of 2015, with shares up 21% since then and the dividend up 10% as well (on a quarterly basis).
American Express stock troubles loom
On the surface, it does seem that the heavy investment in marketing over the past few quarters (post-Costco) has born some fruit. In the first quarter of 2017, they added 2.6 million new cards while tempering marketing spend. However, this figure is a gross number when it’s the net number that’s more important.
And indeed it likely proved too early to shout from the rooftops. In the second quarter, Amex chose not to disclose a similar figure, leading me to think it was less than confidence-boosting. They chose to use vague and unconvincing platitudes such as “There were many signposts of progress this quarter… [like] strong new card acquisition – particularly among affluent consumers in the U.S.” Revenue growth was anemic, and still investors were given no clear sense of the true return on these market splurges and promotional expenditures—only that overall return on equity had declined approximately 5% year-over-year.
The real Buffett-esque question to ask here is whether Amex still has a defensible moat. The brand arguably holds less esteem in the next generation of consumers who, anecdotally, have gravitated toward Chase’s portfolio of cards. JP Morgan Chase’s (NYSE: JPM) big push behind its Sapphire Reserve card last year was an overwhelming success, signing up over a million cardholders—half of whom were under 35. The Chase Sapphire Reserve was the brainchild of former American Express executive, Pam Codispoti, who was quoted in a NYTimes articles as saying, “The message we send is, this isn’t your father’s credit card.” Millennials got the message; it resonated with them. Pass on the Royal Ballet tickets.
American Express just doesn’t seem to have what it takes to secure the millennial market. Their new no-fee card with Delta feels more desperate than calculated.
It’s indisputable too, that the credit card industry has become increasingly competitive. The assault is coming not only from its traditional competitors but also the digital world e.g., Paypal Holdings Inc (NASDAQ:PYPL). While it is unlikely that business will just fall off a cliff so long as American Express keeps spending to enhance customer service and rewards, the moat is less viable than it was say, twenty years ago. In this light, expectation of high EPS growth next year and the year after is tenuous.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.