Stamps.com beats up the U.S. Postal Essay

Published: 2020-04-22 15:24:05
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When Stamps.com /quotes/zigman/92950/quotes/nls/stmp STMP +3.68% announced earnings on Oct. 25, the company didnt just deliver a great performance. It delivered a rebuke to a lot of people who think the company is a left-over dot-com dinosaur. Some of these detractors are short-sellers who have sold short nearly 6% of Stamps.coms outstanding shares. But like another of our holdings in the Crabtree Technology portfolio on Covestor, Shutterfly /quotes/zigman/101900/quotes/nls/sfly SFLY -0.21% , Stamps.com has used this misperception to its advantage. It has carved out a dominant niche in a huge and profitable segment: electronic postage. The bulk (93%) of Stamps.coms business is its core Internet-based PC Postage offering. This enables businesses both large and small to print U.S. Postal Service-approved postage with just a PC, printer and Internet connection. Although similar services are offered by both the USPS itself, as well as competitors like Pitney Bowes /quotes/zigman/238474/quotes/nls/pbi PBI -0.29% , Stamps.com customers seem willing to pay about $21 per month for a better user experience.

This might include, for example, its unique ability to natively integrate with Microsoft Word in order to use that programs automated mail merge and envelope printing functionality. Well discuss Stamps.coms specific quarterly performance in a moment, but right now, lets place the company in some context. First, compare Stamps.coms third-quarter year-over-year quarterly revenue growth of 16% with that of its archrival, Pitney Bowes, which reported its own third quarter on Nov. 1. Pitneys revenue of $1.22 billion represented a decline of 6% from its year-earlier quarter. Looking under the covers at Pitney doesnt increase ones confidence, either: Equipment sales (mostly its traditional postage meters) declined 4% year-over-year and its more modern software offerings declined 17%. OK, so it looks to me that Stamps.com is taking share from Pitney Bowes. But what kind of share is there to take? Consider that according to the United States Postal Services own 2011 Annual Report , $43 billion of the total $66 billion in USPS postage is represented by types of mail that Stamps.com can handle.

That includes not only traditional first-class mail, but also priority mail, media mail and parcel-post bulk shipping. According to Stamps.coms own figures, we estimate that its customers will use their PC-postage services to print $1.1 billion in postage in 2012. So this represents roughly 2.6% market share. Theres plenty of room to grow and share to take. So what were the highlights from Stamps.coms third quarter, and why do we think the company is positioned to keep growing profitably? Growth: Core PC-postage revenue growth of 20% in Q3 certainly compares well not only with Pitney Bowes revenue decline, but also with a 2% GDP growth overall. ARPU: Average revenue per Stamps.com user rose again to $21.62 in Q3, continuing its steady ascent. Consider that six years ago, prior to the financial crisis, ARPU was $17.18.

Earnings Power: Fully diluted shares outstanding has dropped from 24.4 million at the end of the first quarter in 2006 to just 16.7 million in the third quarter of 2012. During Q3, Stamps.com bought another 961,000 shares back, and on Oct. 17, authorized the repurchase of another one million shares. Outlook: Can the good news continue for Stamps.com? Management certainly thinks so. When they announced Q3 earnings, management raised its guidance for the balance of 2012. They expect full-year non-GAAP earnings per share to be in a range of $1.55 to $1.75; this compares favorably to managements own prior guidance of $1.35 to $1.55 and was above the then-consensus of $1.50 per share (according to I/B/E/S Estimates ). So what are the risks to Stamps.coms continued run of excellent performance? Total Mail Volumes: As noted earlier, theres plenty of market share for Stamps.com to take profitably, but total U.S. domestic mail volumes continue a slow decline.

Total USPS revenue was $70 billion in 2005 and declined to $66 billion in 2011, and that occurred despite rising postage prices. So the trend is not in the right direction. Despite Stamps.coms recent corporate success, it seems likely to continue facing doubts about its business model in a world full of electronic mail. But as you weigh whether or not Stamps.com is a good investment, consider that until someone invents teleportation of physical goods, no one will be emailing grandma a box of cookies any time soon. Or a pump for her flooded basement. Or an iPod on which she can read, yes, your emails. This commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Disclosure: Mr. Randall is long STMP and SFLY

Questions:
1) Stamps.com is a good example of using ICT to reduce the threat of substitute products or service. Explain how. 2) How do you think Stamps.com achieved the first mover advantage?

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