American Express: Buy, Sell, or Hold?

American Express (NYSE: AXP) shares have been on an absolute tear. In the past 14 months, they have catapulted 100% higher (as of Dec. 16), consistently hitting fresh all-time highs throughout 2024.

After such a monumental gain in a short period of time, investors are probably wondering what the best course of action is as it relates to American Express and their portfolios. Should you buy, sell, or hold this financial stock?

Durable competitive strengths

American Express is a quality enterprise because it possesses an economic moat. This means that it has durable competitive advantages that have solidified its industry position, protecting it from rivals. I believe Amex possesses two primary strengths in this regard.

The company's brand is one critical part of its moat. By presenting itself as a premium credit card brand, American Express is able to attract an affluent customer base. These people have the ability to spend more than the average person.

Targeting this demographic means that American Express can charge high annual fees for some of its top credit cards. But this hasn't prevented the number of active cards from climbing over time, from 111.1 million in the third quarter of 2014 to 145.5 million in the last quarter. Even more noteworthy, the business has generated higher average fees per card, a figure that increased 13% year over year in Q3.

The Amex brand is also doing a great job resonating with a younger demographic. "Spend across our affluent U.S. consumer base continued to be very stable with strong growth from millennial and Gen-Z customers, up 12%," CFO Christophe Le Caillec said on the Q3 2024 earnings call. That was faster growth than any other cohort. The business can benefit because these consumers could be customers for a very long time.

American Express also benefits from powerful network effects. All of those active cards in use across the globe are incredibly valuable for merchants that don't want to miss out on potential revenue generating opportunities. On the flip side, Amex's acceptance at 89 million merchant locations worldwide gives cardholders plenty of places to spend their money. As each group increases in size, the value of the Amex network grows.

Steady financial performance

American Express has seen healthy growth trends thanks generally to rising spending that occurs across the economy. The popularity of cashless transactions also provides a lift.

The result is a steady increase in payment volume, which totaled $441 billion in Q3, up 5% year over year. Unsurprisingly, this is boosted by Amex bringing on new card members. It also gets help from the company's many valuable partnerships, like those with Delta Air Lines, Marriott International, and Uber Technologies, that allow consumers to earn more rewards, incentivizing spending activity.

This has spurred revenue growth over the years. In the last decade, the top line has nearly doubled. And with a 15% net income margin in Q3, this is a consistently profitable business.

Investor returns are bolstered by management's capital allocation practices, which themselves are only possible because Amex is very profitable. So far in 2024, the business has paid $1.5 billion in dividends and repurchased $5 billion worth of outstanding shares.

Amex's valuation

Amex shares' impressive performance in the past year or so has made the stock more expensive. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 22.3. This represents a premium to its trailing three-, five-, and 10-year average P/E multiples. It's safe to say that the current setup for prospective investors isn't exactly a bargain.

However, I believe there are a lot of reasons to appreciate Amex's business, from its competitive strengths to its steady growth, consistent profits, and capital returns. What's more, the current valuation isn't at an extreme level.

So, if you've been a shareholder, I don't believe there's a reason to sell right now, making the stock a solid hold today.