United Parcel Service (NYSE:UPS) investors have watched their stock decline nearly 6% this year. Essentially, a poor performance during the winter (primarily due to the harsh weather and stronger-than-expected peak demand in the holiday season) has been followed by the need for increased investment. As such, the latest results saw the company lowering full-year earnings expectations. All of which raises some questions as to the future growth rate of UPS. Let's take a look at the bearish case for the company and discuss some issues management needs to deal with.

Demand shifting toward lower-yield packages?

As I've discussed in previous articles, UPS is seeing two significant shifts in end demand. As with rival package deliverer FedEx, its customers are shifting toward slower and less expensive ground-based services, while the continued strong growth of e-commerce means UPS is delivering proportionately more lighter-weight packages. Both shifts are not good news for the company's yield per package.

The U.S. domestic package segment makes up more than 60% of revenue for UPS. Here is how the sales dynamics have shifted in the last few years within the segment (the deferred category simply refers to cheaper, less time-sensitive deliveries):

Source: United Parcel Service company presentations.

Clearly, ground-based revenues have grown more quickly in the last couple of years than the other components of the U.S. domestic package segment. For ease of reference, ground made up 43.5% of total company revenue in the second quarter, while next-day and deferred contributed 11.5% and 5.8%, respectively.

Moreover, ground revenues generate significantly lower revenue per package. For example, in its last quarter,the next-day delivery segment reported revenue per package of $20.73, with deferred coming in at $9.73 and ground at $8.03. In addition, the last two years have seen a decline in place for the ground segment. For example, revenue per package in the ground sub-segment was $8.08 in the second quarter of 2012, then declined to $8.03 in the comparable quarters for 2013 and 2014. A difference of $0.05 may not seem much, but remember that it's an absolute 0.6% decline in two years when inflation has been rising at 2% to 3% in the economy.

 The effects of this can be seen when looking at adjusted operating margins since the start of 2012. It's notable that the decline in the U.S. domestic package segment (primarily caused by the shift to lighter-weight ground packages associated with e-commerce) has pulled down overall margins since then. The U.S. domestic package segment makes up around 64% of segmental income, so its margin decline tends to have a greater impact on overall margins.

Source: United Parcel Service company presentations.

All of which leads to the first two bearish arguments with UPS. First, its margin challenges could be an ongoing facet of the company's operations and therefore cause growth to be lower than analysts expect. Second, the necessity for investment to restructure the business to deal with growing e-commerce volumes (and the peak demand issues that this creates) could hold back earnings growth in the future. In fact UPS recently lowered full-year estimates, partly as a consequence of increasing investments.

Amazon drones

The third reason UPS, and FedEx, for that matter, could suffer relates to potential competition from companies such as Amazon.com moving into delivery via drones. FedEx CEO Fred Smith has previously indicated his confidence that his company, UPS, and the U.S. Postal Service would still be responsible for the "vast majority of products moved" simply due to the necessity of having a large network in place to transport products.

However, it's quite possible that Amazon can move into the last-mile delivery market and perform local deliveries using drones. Indeed, Amazon has asked the Federal Aviation Administration for authorization to test its drones outside of the agency's testing areas. Amazon is clearly developing drones for its Prime Air service, and Google also has a drone project under way. Moreover, the fact that UPS and FedEx have drones in development is a testimony to the fact that unmanned aerial vehicles could perform last-mile deliveries in the future.

The takeaway

All told, the threat from Google's and Amazon's drone programs is not immediate, but it could pose problems in the future -- particularly as lightweight e-commerce deliveries are becoming a larger part of UPS' business. The more immediate threat comes from the structural changes in end demand from an increase in lower-yielding deliveries such as ground (coming from e-commerce and customers' willingness to forgo faster, more expensive deliveries), which could threaten margin growth in future. Indeed, it's already had an effect on this year's earnings. Time will tell if UPS can get back to long-term double-digit earnings growth.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, Google (A and C shares), and United Parcel Service. The Motley Fool owns shares of Amazon.com and Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.