Everyone in the World Seems to Be Downgrading Stamps.com Today. Here's Why.

Investors just returned Stamps.com to a stock price half what it was just yesterday.

Rich Smith
Rich Smith
Feb 22, 2019 at 12:12PM
Technology and Telecom

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Well, that certainly was a gut punch.

Stamps.com (NASDAQ:STMP) reported its fourth-quarter 2018 earnings last night, and while at first glance all the numbers looked fine, with quarterly earnings up 6% and sales up an even stronger 29%, the company basically knocked over the chessboard when it came time to give guidance.

In 2019, Stamps.com expects to book a 5% revenue decline to roughly $555 million (from $587 million for all of 2018), and a 63% plunge in profits to $3.31 per diluted share (from $8.99 in 2018).

Wall Street analysts (and investors) are rushing to punish the stock on this news. So far, both Roth Capital and Maxim Group have downgraded Stamps.com stock, with Maxim going to hold and Roth diving to sell, according to TheFly.com. Analysts at Craig-Hallum cut their price target by more than half, to $125 a share, while B. Riley FBR is only a bit better with a new $130 price target.

Check out the latest Stamps.com earnings call transcript.

Return to sender stamped on envelope

Investors just returned Stamps.com to a stock price half what it was just yesterday. Image source: Getty Images.

What went wrong

For fiscal Q4 2018, Stamps.com reported:

  • Declining churn among its customers, to just 2.9%;
  • 8 billion pieces of USPS postage printed;
  • a 29% increase in average monthly revenue per paid customer;
  • a 29% increase in GAAP revenue to $170.2 million; and
  • adjusted EBITDA growth of 11%.

None of that matters today, though, because yesterday, Stamps.com turned its back on its biggest customer. As CEO Ken McBride said on the company's post-earnings conference call: "Our revenue share partnership [with the U.S. Postal Service] has now ended."

Why the company did that

Here's how McBride explained Stamps.com's decision to cut exclusive ties with its largest customer -- the source of 88% of the company's revenue:

"Things are changing really rapidly in the shipping industry and as we look five years out, we see the shipping industry being dramatically different than it is today. Today the U.S. industry is still largely controlled by the three big traditional carrier companies: UPS, FedEx, and USPS."

But worldwide, "E-commerce shipping is the fastest-growing part of the mailing and shipping industry ... e-commerce sales grew approximately 16% year over year in the United States ... and cross-border e-commerce volume is expected to grow by 28% over the next three years."

UPS, FedEx, and DHL are all shifting their investments to focus on serving the e-commerce market. At the same time, "Carriers that focus only on smaller geographic regions which we call regional carriers ... often [are] able to undercut the prices of the national carriers for similar service times" within their regions. Uber and Amazon are entering the parcel delivery market in the U.S., too, while internationally -- where Stamps.com has been shifting its focus -- "the shipping business outside the U.S. is very fragmented and the customer preferences and expectations in those businesses are very different."

All of this raises "concerns that [USPS] may become less competitive over time ... Our customers are demanding and need two-day delivery guaranteed in order to be competitive in e-commerce in general, and thus in order to meet that need they need to have carriers other than the USPS." 

Recognizing this, Stamps.com tried to convince USPS to renew its favored position as one of just a handful of authorized PC-based shipping-printing companies, while permitting it to service other shippers as well. Stamps.com went so far as to make this a "non-negotiable" item in its contract negotiations. Unfortunately, "USPS has not agreed to accept these terms or any other terms of our partnership proposal. So, at this point we decided to discontinue our shipping partnership with the USPS so that we can fully embrace partnerships with other carriers who we think will be well-positioned to win in the shipping business in the next five years."

And that's the situation in a nutshell. USPS balked, and Stamps.com walked.


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What this means to investors

Now, this is not all bad news. USPS ships 20 billion packages a year, says McBride, while "the worldwide market for shipping is 260 billion. So you can see the total addressable market going up dramatically for this company as we focus on worldwide multicarrier shipping."

At the same time, McBride reassured investors that "we remain partners ... we're still working with the USPS [and] we will continue to bring USPS products to our customers where it makes sense" at the same time as it attempts to negotiate "partnerships with all of the major incumbent private carriers and ... new entrants into the U.S. shipping business."

Nevertheless, "Our direct arrangement with the USPS, which is the ... commission component, which is our direct relationship with the post office on a revenue basis, that is now gone."

What happens now

Tragically, with it went roughly two-thirds of Stamps.com's profit-making power. Granted, there's still hope that it can rebuild over time. The company certainly makes a good case that in cutting loose from USPS, it's opened a (literal) world of new possibilities for growth. Unfortunately, it appears this will be growth off of a much smaller profits base -- and it's going to be a long haul getting back to square one.

Two final quotes here should give you an idea of how long it could take for Stamps.com to return to the share price it enjoyed just 24 short hours ago (emphasis added):

"As our approach to the changing times plays out over the next five years and beyond, we think those of you who continue to hold our stock for the long run will agree with our change in direction." 

"The short-term financial impact we experience as we forego our shipping revenue share with the USPS will represent some short-term pain for us over the next few years."

Although I have to credit McBride for being up-front and realistic on the timeline, I honestly cannot blame the analysts for downgrading -- or blame any investor for bailing -- after this disastrous news.