Is the Market Underrating American Express's Growth Runway?

American Express (NYSE: AXP) stock has sputtered this year compared with its benchmarks, sector, and major competitors. The stock is down about 6% year to date, while Visa is up 6%, and Mastercard is flat. The Dow Jones Industrial Average and S&P 500 -- two indexes that include American Express -- are each up 13% so far this year. And the financial services sector within the S&P 500 has averaged a 5% return.

But based on several factors, investors and analysts may be underrating the financial services giant. Just 48% of Wall Street analysts rate it a buy, compared with 93% each for Mastercard and Visa. Here's why you should consider this underrated and overlooked payments stock.

Image source: Getty Images.

Concerns about spending

American Express stock struggled in the weeks leading up to its second-quarter earnings release as investors grew concerned about the macro environment and its impact on banks, consumer spending, rates, and credit quality. But when American Express reported Q2 earnings on July 24, the stock price rose as investors were pleasantly surprised.

Revenue increased 10% year over year to $19.6 billion but fell just short of estimates of $19.7 billion. Earnings were up 11% to $4.53 per share, beating estimates of $4.40 per share. And credit quality was strong, with provisions for credit losses and 30-day delinquency rates down year over year and net write-offs holding steady.

Based on strong performance, American Express raised its revenue guidance for the fiscal year to 10% growth -- up from 9% to 10%. It did not, however, boost its earnings guidance, which it kept at $17.30 to $17.90 per share. That would be about 14% growth over fiscal 2025 at the midpoint.

But some investors were concerned about higher spending, as expenses rose 12% in Q2 to $14.5 billion, outpacing revenue growth. Part of the increase was due to higher spending on customer engagement and acquisition costs.

On the earnings call, CEO Stephen Squeri said the higher spending on marketing, technology, and customer engagement and acquisition is necessary to maintain high retention rates and ensure long-term growth. And this is the time to do it, after strong revenue growth in the first half of the year. Squeri said:

As our strong performance has shown, we are winning with the next generation of premium customers, and we have significant growth opportunities across our businesses and around the world. Taken together, this gives us confidence in our long runway to sustainable growth and our ability to continue delivering attractive returns for our shareholders.

Time to buy?

The concern is that this investment ramp-up, which is expected to continue in the second half of the year, will slow growth. But even the 14% projected earnings growth would be higher than the 10% earnings growth rate in 2025. And the consensus among analysts calls for about 14% growth in 2027, to an estimated $20.12 per share.

American Express has long been a well-managed company -- it's why it is one of the largest and oldest holdings in the Berkshire Hathaway portfolio. With its lower valuation, trading at 20 times earnings, and its investment in long-term growth, it's an underrated buy right now.

American Express is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool has a disclosure policy.