While the United States Postal Service may be limping toward extinction, postage itself is far from a dying business. Web-based Stamps.com (NASDAQ:STMP) had worried investors and analysts for some time that demand would soften along with the USPS decline, but it's done nearly the opposite. In its most recent quarter, Stamps.com broke company records and showed strong promise in the future. The announcement delighted investors, sending the stock up more than 13% immediately following. But with a relatively rich valuation, the company may only be a buy for opportunistic, growth-happy investors. Here's what you need to know.
Posting big earnings
In its core, PC-postage business, Stamps.com earned a record $30.3 million for the first quarter -- a 16% gain over the prior year. This was the tenth consecutive quarter of double-digit postage revenue growth, which should easily eliminate the theory that Stamps.com's postage business will follow suit with the demise of snail mail. Net income was up 57%, to $9 million, and EPS hit $0.57 per share. Both numbers were company records.
It wasn't just past performance that was exciting, though, but the company's new customers that really drove the point home. Stamps.com signed on an additional 92,000 small businesses this quarter -- the largest sequential additions in paid customers in the company's history. The cost per new small business acquisition shrank 3%, to $106, boosting margins slightly. Average revenue per user is up 3%, to $21.71 -- another record number for the business.
What seemed to be the worst part of the quarter was the company's partnership with Amazon. Volume through Amazon was down again and, as management put it, continues to be a drag on company growth.
Total postage used by Stamps.com customers in the first quarter amounted to $378 million -- a 71% premium to the year-ago quarter. Though not a direct metric for the company's financial performance, it is an indicator of customers' value.
When your partnership with Amazon is the worst part of your business, it's a good sign that things are going well. So what lies ahead for Stamps.com and its investors?
The company seems to be effectively scaling its marketing spend, which is incredibly important given the nature of this business. Though it increased its acquisition spend, on a unit basis, the number dropped and led to a record quarterly small business acquisition figure. This is all in light of the fact that small businesses still feel iffy -- and even less confident compared to the same time a year ago -- about the economy, according to the National Federation of Independent Business. If the environment picks up, investors can expect even better growth from Stamps.com's small business segment.
Enterprise-level growth is up 53% year over year, and shows no signs of slowing. High volume shippers (warehouses and the like) grew 74% from the prior year.
Management is expecting $125-$135 million in 2013 revenue, with EPS from $1.68-$1.88. With today's stock price, this implies an average forward P/E of about 19 times earnings. However, analysts seem to expect even more, with the average EPS at $2.02 -- implying 16.75x forward P/E. The company likely warrants its relatively high valuation, though it should not be on the menu for value-conscious investors. Of course, only invest in companies in which you are comfortable and knowledgeable.