A Stock with Room to Run

Based on Stamps.com’s (STMP) last closing price of $187.44, shares currently trade at 11.8x and 17.6x our FY ’19 adjusted EBITDA and non-GAAP EPS estimates, respectively. Over the past five years, the company’s valuation on a forward EV/EBITDA basis has ranged from approximately 8x to 20x with a median of 12x. On a forward P/E basis, shares have traded as low as 10x and as high as 26x with a median of 19x. Given the company’s strong growth trajectory and best-in-class margin profile, we believe shares should trade at the higher end of its historical trading range. Our price target of $320.00 represents a FY ’19 EV/EBITDA multiple of approximately 20x.

Aside from considering STMP’s historical trading range, we also analyzed the valuation multiples afforded to a peer group comprised of cloud-based providers of software and services to the SMB market. As depicted in our comparable companies analysis below, Stamps.com’s peer group trades at median FY ’19 EV/EBITDA and P/E multiples of 23.1x and 76.5x, respectively. As several of these companies remain more focused on growth than profitability at this juncture, multiples based on profitability metrics may be somewhat inflated. Even on a forward EV/Sales basis, however, STMP’s 5.3x revenue multiple still compares favorably with the group median of 6.7x. Furthermore, our projected growth rate for Stamps.com, which we have previously suggested could prove conservative, is generally consistent with the median growth rate for the group while our assumed adjusted EBITDA margin is nearly double the group median. Thus, an expectation that shares could garner an EV/EBITDA multiple consistent with the group median appears reasonable in our view.

Prior acquisitions of software vendors enabling e-commerce also lend support to our belief that shares of STMP could fetch a premium to current levels. In May 2018, CommerceHub was acquired by funds affiliated with GTCR and Sycamore Partners for approximately $1.1B in cash, representing TTM EV/Sales and EV/EBITDA multiples of 9.5x and 22.7x, respectively. Management’s projections for 2018 implied anticipated revenue growth of 8.9% Y/Y and an adjusted EBITDA margin of 42.1%. Based on these forecasts, the implied forward valuation was 8.8x revenues and 20.9x adjusted EBITDA. Shortly thereafter, Adobe Systems announced its acquisition of Magento Commerce for $1.168B in cash, equating to a multiple of 7.8x revenues. Also worth noting, salesforce.com acquired e-commerce platform vendor Demandware in July 2016 at a forward EV/Sales multiple of 8.9x. At the time, Demandware was expected to increase revenues by 31.9% Y/Y and generate a mid-single digit non-GAAP operating margin.

Finally, our price target is also supported by a DCF model with the following assumptions: a 15% CAGR over the next five years, a steady return to an adjusted EBITDA margin consistent with the company’s historical highs, a terminal growth rate of 2.5% and a WACC of 7.8%. These assumptions correspond to an intrinsic value calculation of approximately $325.00 per share.

Disclosure(s):

The author holds a long position in Stamps.com (STMP).