Digital payment providers and “war-on-cash” stocks have been among the big winners during these very strange times, as the coronavirus pandemic accelerated the already rapid cashless trend. But one of the names that has slipped under the radar among all the highfliers in this area of fintech is lately American Express (NYSE: AXP).
While there are many great investment options among fintech companies, American Express may be the best value right now with a good long track of growth ahead of it. Oh, by the way, it’s one of the top five holdings of Warren Buffett, president of Berkshire Hathawayand a title he has held for 27 years.
So, there is that. But here are other reasons why American Express is a buy-to-buy stock right now.
American Express is good value for money compared to its peers
American Express is a credit card company and strong brand that has been around since the 1850s. As any cardholder will tell you, it is different from its bigger competitors like Visa (NYSE: V) is MasterCard (NYSE: MA) as it is its own financial network, so it does not issue credit cards using third party banks to finance transactions. Instead, it lends money to the card user himself and then requests a full refund at the end of the month.
But, like its competitors, it is a major player as the third largest credit card company in the growing cashless trend. There are plenty of statistics out there showing society is gradually moving away from cash, with some experts predicting entire economies will be cashless by the end of the decade. There are huge growth opportunities for companies in this space, especially established ones like American Express.
One of the things that sets American Express apart from its competitors right now is its value. While valuations for other fintechs have risen over the past year as people flocked to tech stocks, American Express has a forward price-to-earnings ratio of 17, which is much lower than its peers. The share price has fallen about 6% year to date as the company was negatively impacted by lower spending caused by the pandemic and recession. The big damage has been travel spending, which has long been a big revenue driver for the company and has nearly dried up.
But despite it all, American Express has a 15% return on equity and 14% operating margin, which means it is generating solid returns from its assets.
The digital banking platform is ready for take-off
There are a few reasons to be optimistic about American Express. First, as mentioned earlier, the company is well established in a growing industry. Second, the pandemic will end (likely in 2021) and travel will return, as will consumer spending. On the company’s third-quarter earnings call, CEO Stephen Squeri said there is a lot of pent-up demand for travel among American Express cardholders. Finally, the company is built on a solid financial foundation. As a bank, it has a Common Equity Tier 1 ratio of 16.1%, which is more than double the regulatory minimum. And it has sufficient liquidity with $ 33 billion in cash and cash equivalents, up $ 9 billion from the end of 2019.
American Express used its capital strength to make investments last quarter, most notably by acquiring fintech company Kabbage, a digital lender that provides small business loans. American Express owns the digital platform, the technology, all of its products, data and intellectual property, but not the company’s loan book. Kabbage’s technology automates the lending process with decisions made in minutes.
Company officials see the acquisition as an opportunity to develop their digital banking platform for small businesses, using the technology platform as a competitive advantage. It may not immediately generate huge profits, but over time this could be a differentiator for American Express and provide an additional source of long-term profits.
While there are many good fintech stocks out there, few areas have the growth potential of those in the cashless space. American Express has the brand, track record, and growth potential to thrive for many years. And with this relatively low rating, now isn’t a bad time to get in.