The Stamps.com (NASDAQ:STMP) stock price has declined by over 50% in the last month. This is largely due to the internet-based postage services provider ending its agreement with the USPS, which is set to cause short-term challenges.
It will seek to offset the financial impact of the decision through a surcharge on existing customers, as well as leveraging current partnerships. The company is also set to invest in new technology, partnerships and in new features as it seeks to win shipping customers.
With its profitability expected to improve in fiscal 2020, the company’s valuation suggests that it may be able to deliver a recovery. Having fallen heavily in recent weeks, its stock price could offer good value for money as well as turnaround potential.
Shipping potential
Investment in the company’s shipping segment could lead to an improved growth rate in future. It expects to make continued large investments in this space, with it aiming to increase the number of warehouses, fulfilment centers and large retailers which make up its shipping customer base. Although they have historically been more costly to acquire when compared to small business customers, shipping customers yield higher long-term returns on investment. They have also historically offered lower churn and higher usage over the long run.
The company expects to generate a high return on its investment in shipping customers, which is set to lead to an increase in its marketing expense in fiscal 2019. As part of this, it will ramp-up its direct sales spending, as well as refining its customer acquisition process through partners and affiliates. It will also invest in search engine optimization and search engine marketing, as it focuses to a larger extent on digital opportunities.
Changing strategy
Stamps.com intends to enhance the technological appeal of its customer offering. It is aiming to add a variety of new features and functionality in order to improve the customer experience. This includes new integrations for easier data export and import from the tools used by customers. It will also add new carrier and partner integrations as it builds support for inventory management, customer management and mobile solutions, as it seeks to improve the customer experience.
Further investment in its global advantage program will include features such as free package pickup and free insurance which are bundled in with its international shipping program. Its international growth plans also include the development of partnerships, with it having recently launched 17 new partnerships with international operators such as Parcel Force and DPD. Partnership growth is also expected to include a deepening of the company’s relationship with Amazon (NASDAQ:AMZN), with it having launched Amazon Australia in the most recent quarter.
Risks
Stamps.com will no longer partner with the USPS after the latter refused to agree to terms that would have allowed the former to work with other providers. This is expected to lead to significant challenges for the business in the short term, with it set to lose out on its shipping revenue share with the USPS. The company now expects its fiscal 2019 revenue to fall 5.4% from its 2018 level, while earnings per share is forecast to decline 40% in the same time period.
In order to mitigate the impact of its decision not to renew with the USPS, Stamps.com will implement a broad-based customer surcharge for some of its higher volume customers that are on negotiated service agreements. This will stand at 3% of their shipping volumes in order to defray the costs of their shipping software, since the USPS is no longer paying for the software.
The company will also aggressively drive the revenue of other carriers where it has revenue share agreements in place. It is in discussions with traditional and non-traditional carriers regarding new agreements being put in place, which could further offset the decline in revenue from the end of the USPS agreement.
Verdict
The near-term prospects for Stamps.com could be challenging. The company’s profitability is expected to be hit by the end of its partnership with USPS, which may lead to further stock price volatility. Even though it is aiming to offset the impact of the loss of the partnership through various measures, a 40% forecast fall in earnings per share in fiscal 2019 would be highly disappointing.
The company, though, appears to be putting in place a sound growth strategy. Further partnerships, alongside investment in new technology and the addition of new features designed to win new shipping customers, could lead to improving financial performance.
The stock is forecast to record a rise in earnings per share of 34% next year. With a forward P/E ratio of 17, it could offer recovery potential over the long run.