Motley Fool Money - Gen Z & Millennials Are Driving AmEx Higher

Episode Date: January 30, 2023

If American Express had a problem with an aging demographic, it looks like that problem is being addressed. (0:20) Jason Moser discusses: - Shares of AmEx popping 15% in two days off of strong guidance for 2023 - How younger customers are the majority of the company’s growth story - Why he’s going to be watching Amazon’s revenue when it reports earnings on Thursday (11:00) Tim White and Tim Beyers discuss the implications of Microsoft’s $10 billion investment in ChatGPT. Companies discussed: AXP, GS, AMZN, MSFT, GOOG, GOOGL Host: Chris Hill Guests: Jason Moser, Tim Beyers, Tim White Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill, joining me in our brand new studio. It's Motley Fool Senior Analyst, Jason Moser. Good to be here with you. It's a beautiful day. It's a beautiful day. It is a beautiful day. It is a down day for the market at the moment, but shares of American Express continue to rise. Fourth quarter profits and revenue were a little bit lower than analysts were expecting. But the guidance that Amex put out for the new fiscal year was pretty strong. between Friday, which is when we got these results, and today, shares of American Express

up 15%. This is the best run in the short term that this company's had in a while. Yeah, you don't see a business like this make that kind of move in such a short period. Not typically, I am. But I do think, I mean, the theme here for the quarter, for the year, the U.S. consumer hung in there, right? I mean, for the quarter, for the year, I mean, versus the other sides of the business, the commercial services side, the international side. I mean, there were some currency effects, of course, that played in the international side of the business, but they just continue to build itself into a brand that resonates beyond just the lifestyles of the rich and famous, which is kind of what they were known for for so long. And I'm

going to save you, my Robin Leach impression. Thank you. And the listeners as well. Let's just move forward. Looking at the numbers, I think they were very encouraging. Revenue for the quarter was up 17% to $14.2 billion. That was driven by consumer spending, primarily. Earnings per share, $2.7. It compares to $2.18 from a year ago. They saw a little pressure on the expense side. We'll get to that just a sec. Generally speaking, this is a very similar narrative to a lot of the banks we've been talking about. And remember, American Express is a bank holding company, so they are beholden to those rules and regulations. Net interest income,

up 31% for the quarter. Not terribly surprising, given the rate environment, but also remember American Express, benefits from primarily fee-based products, right? Those fees that come with owning those cards. But network volume up for the quarter, up 12%. It was $413 billion. We talked a lot with the big banks about provisions, right? They're seeing some losses coming down the pike here, and so consolidated provisions for those losses for American Express. They were $1 billion, compared to $53 million from a year ago. Not terribly surprising to see there. And if you look at the total reserves, total reserves ended the year at $4 billion.

That's about 2.4% of total loans and card member receivables. That's essentially flat with a year ago on a percentage basis. Again, back to the expenses. Those were up 15%. Saw a big boost in travel-related benefits, which I think makes a lot of sense. Folks are getting back out. But all things considered, I think this was a really respectable quarter. It was, and Amex keeps its streak as a dividend aristocrat intact. They also announced a boost of their dividend of 15%. It's interesting to see, is it an overstatement to say a demographic shift?

I mean, this is, we've talked in the past about Amex, in some ways, being an older brand, attracting older customers, And you dig into the result, it seems like they are doing an effective job of appealing to younger people. They really are. I think that was the big question mark for a long time was would they be able to do that in this new Fintuit-driven environment where there's seemingly a brand-new offering every day? They've done a tremendous job. They acquired 3 million new card members for the quarter. But if you look at the full year, new card acquisitions grew 12.5 million. members, and nearly 70% of those new accounts acquired are on their fee-based products.

And you know how powerful those fees can be. But when you look at attracting that younger demographic, I was really impressed to see this. Millennial and Gen Z customers are the largest drivers of growth through the business. They represented over 60% of consumer card acquisitions in the quarter and for the full year. So, that was a big question mark we had with AMX several years back. Fast forward to today, it really does look like they've built this suite of offerings to really serve everyone out there. And that really matters in this day and age when you think about how much competition is

out there, how many offerings exist today? American Express is still holding a strong position. Particularly in the wake of the most recent wave of big bank earnings and part of the narrative there was the struggles that Goldman Tax and others are having with their more consumer-finance-based tech solutions that they were shelling out tens of millions, if not hundreds of millions, of dollars for. Yeah, that's a good point there. You look at something like Mark is, clearly something that was built with the younger consumer

in mind. Clearly also not gaining very much traction, right? Goldman having really pulled back on all of those investments. I think for them, they have a bigger playing field, right? I think they can experiment more. And it really, I think, goes to show you, too, the strength in the card holder rewards programs. You can pull different levers there and try new things, which clearly they're doing. You get back to the stock. You mentioned the dividend, I think, is terrific. Also, they continue to repurchase share. Share counts down about 13.5 percent since 2017. So when you look at the

stock today, given the guidance for the coming year, at the midpoint that puts shares around 15 times full-year earnings estimates, it's not terribly outrageous, given the quality of this business. You look at the last year, the stock has held flat, but you go out three and five years. It starts to look a lot better, and ultimately five-year returns. Stock's up almost 90 percent and better than doubling the market, so things have been working out well for patient shareholders here. Twenty-one percent of the companies in the S&P 500 are reporting their latest earnings. earnings results this week. Apple, Alphabet, Amazon, AMD, Amgen. That's just the A's. What is one company

you're going to be watching this week, maybe a little bit more closely than others, and what are you going to be watching for or listening for on the call? Yeah. We always, Amazon's always an interesting business because there's so many facets to it. So Amazon, to me, when earnings come out Thursday after the market closes, I mean, it's going to be, I I think it's going to be fun to watch how the market reacts, and really we want to pay attention to what management's saying here. If you look at last quarter, they saw sales growth 15 percent, and that growth was essentially flat with the previous year.

Now, they're guiding for revenue in the range of 2 to 8 percent this time around, which would compare to growth of 9 percent from the same core a year ago. But when you look at the challenges the business is dealing with today, right? I mean, you've got the retail performance that I think is raising. some questions, probably more questions than something like AWS. AWS continues to succeed. It's the lion's share. I mean, it really is all of the companies operating profit, to be honest. So I think looking at the retail operations for Amazon, the state of the retail operations

today, they had a glut of warehouse space, right? They've had to figure out kind of how to right-size the business in some ways. Obviously, they are undergoing some layoffs as well. So I think getting an idea of the state of the retail operations, you have a lot of talk here these days about what if Bezos decides to maybe come back and try to help this business find its bearings. I think it's an interesting conversation to have. I'd be very surprised if it happened, though. It's totally possible, but you have to ask yourself a question, what would Bezos do differently than Jazzy's doing right now? A lot of what Jassie is cleaning up occurred still under Jeff Bezos. I'm not knocking Bezos. A lot of companies made a lot

of decisions based on some abnormal circumstances. Jassy's kind of in the middle of cleaning that up. I'd be surprised if that narrative of perhaps Jeff Bezos comes back, if this is a dud of a quarter. I don't know. That's really the solution. But getting a better idea on the state of the retail operations there, are they making progress and right-sizing the business? It's going to be a very interesting call for sure. I think he wants to? I mean, he seems he's having fun with outer space. I just cannot imagine he'd want to get back to that day and day grind.

Jason Moser, thanks for being here. Thank you. Chatbots have been around for years without a lot of fanfare. So, why is Microsoft investing $10 billion in OpenAI, the creator of ChatGPT? Tim Byers and Tim White look at the implications of the deal and how big a threat it could be to Google search? Tim, we've got to talk about OpenAI, which is the company behind ChatGBT, GBT, which seems to break news every single week. And this week, we are talking about Microsoft's reported

10 billion, I should say reported, not confirmed, $10 billion investment in OpenAI to take a fairly big stake. And presumably, have some influence over chat GPT. What is your instant reaction to Microsoft sort of stamping its foot in this space and saying, look, Azure is going to be the cloud for chat GPT, and that's the way it is because we just wrote a $10 billion check. Yeah, I think Microsoft really had no choice.

They believe, like a lot of people, to do that generative AI like ChatGPT, is capable of competing with Google in terms of people's attention in getting the answers to questions. And it already is winning hearts and minds among programmers in particular to get answers to coding questions and to even write code for them. And I experimented with this quite a bit. And it is pretty good at writing basic code from a relatively small textual description. And so essentially what Microsoft wants to do is bake the idea of generating, text into every one of its products.

So you can imagine you're writing an Outlook email and you can say something like draft a memo to this person that says basically this and it writes out the text of that for you and actually writes all the pros and does that right within Microsoft Outlook. Let's talk a little bit more about how chat GPT functions, like we call it a generative AI. So let's define that and let's define chat GPT and why we think this. has such a big lead here in this space. Right.

So chat GPT is an interface, right? It's a way of interacting with this AI as a chatbot. So you write it some text and it writes back to you and sort of like a chat stream, like you're texting back and forth with it. And chat GPT stands for chat, obviously. And then GPT is generative, pre-trained transformer. So pre-trained, I think, is the really important part here, right? So pre-trained means that this model, this AI model, has been trained to be able to answer general knowledge questions, right?

Open AI's goal is to make general knowledge AI. And to do that, they have to feed it a whole bunch of information. And they stopped feeding it information at the end of 2021. So it really doesn't have any kind of current events type information. It can't answer like what is the weather today or anything like that, right? It can only do sort of general knowledge from pre-2020, but for things like what is the right way to program the software, right? That really hasn't changed in a few years, so that it's really easy for it to do.

But the whole idea of generative AI is it's generating something, right? It's creating something. In the summer of 2022, we had the kind of explosion of image generative AI, such as Dolly, which is also from OpenAI, that creates images from text descriptions. and what chat GPT does is create text and not just text, but like a whole essay or a whole description of something or whatever you wanted to create from a chat prompt. I'm going to draw a comparison here, and then we should talk a little bit about some history because as you and I have talked about AI on the show in the past, there's the race in AI.

is partially, it's a little bit of a boat race in the sense of the AIs, whether or not they have the most elegant design or not, the AIs that get used the most are the ones that are likely to win because they will have the most data and the more data they have. and their ability to draw conclusions and have a library of conclusions based on that data will fundamentally just make them better. They will become better AIs because of it. So this chat GPT in some ways is a bit like, and I think you've made this point before, Tim, like Google in 1999, like, what is this thing? And of course, Google has gotten better because we've used it for close to a quarter century for trillions upon trillions of searches. Right. So in a lot of ways, what OpenAI is doing by making chat GPT free and openly available is essentially saying, here's my toddler. He knows some things.

He's helpful to you in some ways. But if you could train him up and ask him a lot of questions and tell us when he gets things wrong and that sort of thing, he'll be, you know, he'll be a big boy someday. And that is what they're doing, is they're basically opening him to the world to be trained by the whole world. You are talking about, you are basically likening Chad GPT to the little kid that will not stop asking why. Yes, yes. The precocious child is what CHAPT is and Open AI is saying, please train him up for us or train them up for us and have them be smarter every day. And that, I think, is really important to realize that people ask, why are they making this free and open available? Because just like every time you search, Google figures out which link you clicked on and makes that link a little higher on the results next time. Every time you ask it a question, they're making note of that essentially in saying, like, we need to make sure that Chad GPD can answer this question accurately.

It's really interesting. And we made the Google link, obviously, for deliberate reasons, because some, of the history here. And I do want you to talk about this, but, and we could talk about some of the backing here. But according to, you know, I think the most interesting part of the story is the founders, but another interesting just financial piece of this story, if this company does go public at some point, and we're talking now about Open AI, Crunch Face reports $11 billion in private equity funding. So I would expect the valuation. is not cheap, 10 billion of that from Microsoft, but a lot of very well-heeled investors,

Sequoia Capital, Andreessen Horowitz, Tiger Global, Coastal Ventures, Y Combinator, Reid Hoffman, one of the co-founders of LinkedIn. There are some really big investors in this. But I think part of that has to do with some of the history here and the founders. Let's talk a little bit about that because it's got a Google connection. Yeah, so Ilya Sutskever is a Russian software developer who has been in the United States for quite a while now. And he worked on a bunch of projects at various university things that eventually got bought by Google in the early 2000s and turned into what they called Google Brain, which was their sort of internal AI. And then they also bought Alpha, which is known for the deep mind products. And they kind of combined that all into their AI world.

And essentially, you know, Ilya was one of the authors on the AlphaGo paper, which was sort of the huge, like we made an AI that can win against the world champion at Go, which is a relatively difficult game to program things to win at. And as a result, they had a lot of really high-powered AI folks. Well, Ilya left, along with a number of other kind of Google Brain folks, you know, when Alpha kind of became the winner of the AI world at Google and went off along with Greg Brockman, who came out of MIT in 2010, right? So only 13 years ago and created OpenAI.

And one of the co-founders is also Elon Musk. So essentially, a big part of Google's AI brain trust, literally their Google Brain Trust, came out to found this, and now people are making noise like chat GPT is going to be the Google killer. Let's talk about that. Let's talk about implications here, because we've had this discussion on the show. The idea is that, I mean, I'll let you go further on this because you've made this point more elegantly than I have. But there is this point at which, you know, Google gives you the way to search for yourself what you want. And then if you have AI and chat GPT, just doing things for you and serving you so I don't

even have to ask, you just eliminate the ask from the entire process. Is that what makes this so threatening to Google? Yeah, I think so. If you imagine that many, many Google searches are things like, who is this person? What is this thing? How is this code thing supposed to work if you're a programmer you spend a lot of time Googling for things. And rather than getting a back a list of web pages, which have all been SEO optimized within an inch of their life. And so, and there's also just pages and pages of ads now in Google, right? You just get some text that comes back and gives you the answer. And you don't have to ferret it amongst all these web pages and figure out, you know, close all the pop-ups and everything to get your answer, right?

You just get some text that is the answer. And this was sort of the promise of Wolfram Alpha many years ago, but Chad GPT goes way beyond the kind of yes or no black or white questions that Wolfram Alpha could do and actually generates not only the answer to a question, but actual text based on the prompt. Right. So let's close on this. Implications for Microsoft here, because Microsoft's Azure, which is its cloud, will be the cloud for chat GPT, which means there is going to be a lot of AI data going forward.

going to exist inside of Microsoft Azure. And I wonder, Tim, just how big of an advantage this is going to be for, let's say, the Office products, or really every Microsoft product. I mean, where do we see this going? Yeah, I think it could be a huge advantage. That said, Google has this technology, right? They have the ability to do this kind of thing.

They have just not unleashed it because they're afraid of being wrong. If you've ever seen the people also ask and all the other sort of suggested answers you see in Google, you'll often notice that those are often wrong, as are things that Chad GPT will tell you. It's not always right. In fact, it's often not right.

And the challenge here is that AI isn't always right and it won't be for a long time until it gets a lot more training, and that's why OpenAI is doing this. But Google has this technology. They're just going to have to figure out how to get it out in front of people in a way that doesn't make them, look like they're always getting things wrong. So get ready.

Maybe a way to summarize this is get ready for the AI training wars. Maybe Google releases Deep Mind. Microsoft with chat GPT is, you know, gathering data. And we will be on the verge of gathering more data than we ever have. And Microsoft and Google and maybe some others getting into this to gather as much data as humanly possible to understand the world at a scale that we've never tried to before. Right. And OpenAI has hundreds and hundreds of job ads open in Europe for programmers and other folks to come in and help them train ChatGPT to be a great coder and to be a great at answering questions. So they are not just relying on things they find on the internet. They are actually hiring people to make ChatGPT smarter.

Well, this is going to be an interesting space to watch. So pay attention. We'll be talking about this a lot more. This week in tech is every Friday from 1 to 2 p.m. mountain time here where Tim and I are in the mountains. 3 to 4 p.m. Eastern. Most weeks will be on talking about Open AI and all kinds of other tech topics. So we'll see you then. Thanks for tuning in, Fools.

We'll see you soon. Fool on. As always, people on the program may have interest in the state. stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.