With its exclusive deal with the United States Postal Service not being renewed, Stamps.com (STMP) is becoming a different kind of business. Its core service will be matching customers with the right shipping solution. That makes it a partner, and a competitor, for Amazon.com (AMZN -0.82%). That's a challenging space to be in given that the online leader does not always play well with others.
A full transcript follows the video.
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This video was recorded on Feb. 26, 2019.
Shannon Jones: I think what stamps.com investors are hoping for, that there's some sort of way forward. You mentioned, they're now cutting earnings expectations literally in half moving forward.
Let's talk a little bit more about market dynamics. Just how competitive is this particular space?
Dan Kline: It's ridiculous. I've probably done three different Consumer Goods shows and a couple of Industrials shows on the trucking piece of this. You have all the major retailers -- Amazon, Walmart, Target -- taking on last-mile shipping. Amazon has been taking on customers. If they're shipping in your neighborhood, they become a solution that, in theory, the stamps.com platform can plug in as an option. For Amazon, they can be cheaper because they're already delivering, they're already running those trucks, so any added business -- to a point -- is value-added for them. That makes it harder for FedEx, UPS. Everyone is having to try to figure out how to be as efficient as possible and how to take costs out of this. stamps.com is coming in and saying to the company, "We know you're not going to go to six different platforms to figure out the best price. Let us do that for you." In theory, I'd be sitting in my shipping office, put all my stuff in, it would export all the different labels, and maybe three different companies show up to pick up those goods depending on where they're going. So, there's absolutely a place to be here. The question is, that space is crowded, too. We mentioned Shopify. There are other people doing this. The numbers are good so far. About half of their packages last year were not delivered by the U.S. Postal Service. That's encouraging. But, half of them were, and that part is getting more expensive, if not going away.
Jones: Exactly. You hit the nail on the head when you were talking about Amazon. Amazon has been both friend and foe for them. In 2018, Amazon actually made up 88% of their revenue, which is astounding. For investors, that's one of those pink flags, if not a red flag, because you don't want to see that over-reliance on one particular customer. But Amazon has been rather circumspect when it comes to their entrance into the space. They haven't come out until recently saying, "Yes, we are indeed moving, and one of our strategic focus areas is in the shipping and logistics platform." So, now, Amazon has really been the driver for a lot of this. As a matter of fact, if you go through their 10K, I think they talk about Amazon over 200 times. So, formidable foe, for sure, and I think is driving a lot of what's happening.
Kline: It's a foe and a partner. They're going to be presenting Amazon shipping as a solution. As Amazon grows its force going from 20 planes to 27 to 40, and who knows how many they're going to get to, they're building out their network of vans and trucks and all. In some markets, Amazon's a competitor. In a lot of markets, Amazon is a service they're going to be booking things on to. And that's a real fine-line challenge for how to balance your business for any company. "Hey, I rely on you, but you might also use the data I'm providing you to decide to eliminate me."
Amazon scares me because they have said, "We are going to be able to price below market rates." It's very hard for a company that doesn't have the scale to match that.
Jones: It reminds me a lot of Amazon Web Services and their platform. They were basically able to do the same thing, leverage all of this extra capacity on this platform and this infrastructure that we built, and then basically undercut competitors. You see that happening here with this space, too.
Kline: The good news for stamps.com is they're not a shipping company. They facilitate shipping. As long as Amazon needs that and doesn't become so market-heavy that they're always the best solution, companies are still going to need the software interplay that says, "60% of the time, Amazon is best for your local customers. But 40%, it's Joe's Delivery that only operates in Tacoma, Washington," or whatever it happens to be. There is a place to be here, but it's a very narrow piece of the pie that you're going to have to work really hard to solidify.
Jones: That's a great point. To round this out, what should stamps.com investors look for moving forward?
Kline: Don't worry about the next quarter. Don't worry about the quarter after that. What you want to see is the number of these midsize shipper customers increase. You want to see average revenue per user stay at growth rates like where it is. It's fine if they lose the customer that's not going to pay full freight for stamps. It's not fine if they max out in terms of this new type of customer. As long as they can continue, maybe their revenue will halve, but it could build back up. That's what you should be watching for. Don't judge this company by year over year comparisons because it's comparing apples to baseballs.
Click here for the latest earnings call transcript for Stamps.com.