Berkshire Hathaway owns dozens of stocks in its gargantuan equities portfolio. While Apple gets a lot of attention, investors can't ignore a business like American Express (AXP 1.32%). This company has been a favorite of the Oracle of Omaha for a very long time. Here are three things you should know about this top Warren Buffett stock.
Controlling the entire transaction
Investors are likely familiar with banks like JPMorgan Chase and Bank of America. These financial institutions have a huge presence in the market for issuing credit cards. That means that they find customers, run credit checks, approve them, and service the payments.
I'm sure you've also heard of Visa and Mastercard. These businesses don't lend any money, but they do operate the communications network that connects merchants and consumers, facilitating the processing of transactions.
American Express is unique in that it combines both of these functions. Not only does it offer premium credit cards, but the company also runs its own payments network.
Consequently, the business is able to capture most of the economics of a typical transaction that it handles. Amex makes what's called discount revenue from merchants on its network. It collects interest income from its cardholders on their balances. And because its popular products give customers valuable perks and rewards, the company also generates membership fee revenue.
Proven growth playbook
Like many large financial institutions, American Express has been around for a very long time. Its founding dates back to 1850. The fact that the business is still around and thriving is indicative of its durability. I'm sure this is something that Warren Buffett appreciates. The belief is that if Amex has made it this far, it's probable that the company will remain relevant far into the future.
Success has been achieved by following a proven playbook. Above all else, American Express aims to continue growing its customer base. This means adding new cardholders over time.
As of March 31, the business had 142.4 million active cards. That figure was up from 135.7 million in the first quarter of 2023 and much higher than the 108.2 million in the comparable period a decade ago. With more cards in people's wallets, Amex is able to process more transactions and volume, leading to higher revenue potential. The business has done a fantastic job at attracting younger customers, as more than 60% of new card members in Q1 were from the millennial and gen-Z demographics.
American Express also focuses on expanding its partnerships. The company has agreements in place with Delta Air Lines, Marriott, and Uber, for example, that encourage greater usage and spending.
Protected from competitive threats
There's no question that the financial services sector more broadly, and the credit card industry more specifically, is extremely competitive. To be able to succeed for extended periods of time, American Express must have some characteristics that support its competitive position. Indeed, this business has an economic moat.
What helps Amex stand out from its peers is its powerful brand. This is undoubtedly a premium name in the industry. And that attracts higher-income and higher-spending customers, while at the same time making it almost a no-brainer for merchants to want to accept these cards.
And because American Express operates its own payments platform, it also benefits from network effects. As it brings on more cardholders and more merchants, the system immediately becomes more valuable to all stakeholders. This gives me confidence that the business isn't going to be disrupted anytime soon -- a quality which should appeal to many investors.
