Takeaways from Meeting with Management
We met with Stamps.com’s (STMP) finance team, led by CFO Jeff Carberry, at the company’s headquarters in El Segundo, CA. Our focus was largely on the strategic shifts occurring across the domestic shipping industry and the path forward for Stamps.com following the United States Postal Service’s (USPS) curtailing of incentives to the company and resellers within the USPS’ ecosystem. We still lack clarity into the timeframe for any potential agreements with the other major U.S. carriers, but our sense was that negotiations are well underway. Moreover, we view management’s willingness to ramp customer acquisition investments despite the setbacks experienced this year as a sign of confidence that the company will ultimately secure one or more meaningful partnerships. If and when that occurs, we expect significant upside in shares. Even absent that catalyst, however, we believe shares are undervalued when considering the company’s subscription revenue base and its market leadership in the multi-carrier shipping software space. Put simply, we remain bullish on the company’s long-term prospects. Our price target remains $56.50 based on a multiple of 10x our FY ’20 adjusted EBITDA estimate.
Initially, our discussion centered around precedents suggesting carriers would be open to providing incentives to technology vendors like Stamps.com. The major domestic carriers have long subsidized their customers’ access to technology in order to consume their shipping services. For instance, both FedEx and UPS offer customers access to their respective shipping software solutions, FedEx Ship Manager and WorldShip, free of charge. The USPS’ incentive payments to Stamps.com also served the same role historically, providing large shippers complimentary access to the company’s platform in order to procure shipping services. Shopify’s (SHOP) partnership with UPS and the various negotiated service agreements the USPS has extended to technology vendors like Shippo or ShippingEasy also highlight a willingness by carriers to provide incentives to capture the associated shipping volumes. Of course, this also has the effect of subsidizing access to those platforms as the vendors receive economics from the carriers as opposed to their customers.
Beyond a willingness to subsidize technology in exchange for volumes, FedEx and UPS have also communicated plans to expand their presence in e-commerce, particularly with small and mid-sized businesses. FedEx in particular has made headlines of late, announcing plans for its Ground service to commence year-round seven-day residential deliveries in January 2020; the integration of all SmartPost package volume into its Ground network by the end of 2020, thereby reducing its reliance on the USPS for last-mile deliveries; and exiting its domestic Express agreement with Amazon to serve the broader e-commerce market. Of course, Amazon also continues to build out its own logistics network.
Against a backdrop in which the carriers’ strategic priorities are gravitating towards the same e-commerce merchants targeted by Stamps.com, the company appears to be in prime position to support each carrier. Per management, subscribers to its multi-carrier solutions are highly price sensitive as it relates to shipping rates in similar service categories. As the company has ample insight into its customers’ activities, we believe Stamps.com can effectively target volumes aligned with those coveted by each carrier. Thus, with the right economic arrangements in place, carriers could efficiently capture their desired e-commerce volumes. Management agrees but noted that such negotiations are complex given the range of service categories, rate tables, volume requirements, and other factors involved. Thus, the lack of a major partnership agreement just five months following the loss of incentives from the USPS is neither surprising nor concerning. Should the shipping industry as a whole move away from subsidizing or incentivizing technology providers, however, the company could redirect its efforts toward extracting greater economics from customers instead, which would be more akin to the dynamics of the European market where MetaPack has established a strong position. In either scenario, management believes the returns on investments to acquire shipping customers remain highly attractive.
Headline risk pertaining to Stamps.com’s remaining revenues associated with USPS resellers remains our primary concern going forward. However, we believe the potential loss of those revenues is adequately discounted in the stock price already. Conversely, shares reflect no confidence in the company’s ability to replace the lost transaction revenues. We therefore consider the risk/reward proposition favorable. With shares trading at just 6.7x our FY ’20 adjusted EBITDA estimate, which assumes ongoing reductions in reseller revenues and no contribution from potential agreements that could be struck, we see this as an attractive entry point. Our price target of $56.50 represents a FY ’20 EV/EBITDA multiple of 10x.
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Disclosure(s):
The analyst, a member of the analyst’s household, and/or an account in which the analyst exercises discretion hold(s) a long position in the common stock of Stamps.com (STMP).