All Signs Point to Q3 Upside and Raised Outlook

Stamps.com (STMP) reports Q3 ’20 results after market close on Thursday, November 5. As communicated in our last report, “USPS PC Postage Revenue +52% Y/Y in August”, data for the first two months of the quarter suggests Stamps.com is poised to meaningfully outperform both consensus and our expectations for Q3. While the final tally for September remains unknown, recent earnings reports from UPS and several e-commerce marketplace and platform providers lend support to our expectations for another quarter of robust growth in shipping volumes. Importantly, the growth in shipping volumes has been led by the small and medium-sized businesses (SMB) typically served by Stamps.com, providing for incremental monetization opportunities via new paid subscribers and partner integrations. With this in mind, we are raising our estimates across the board for this year and next.

Exhibit I: Estimate Revisions

For Q3, we were already modeling revenue, adjusted EBITDA and non-GAAP EPS estimates ahead of consensus. Still, we are increasing our estimates further on the assumption that shipping volumes associated with the company’s strategic carrier partnerships likely increased in excess of 50% Y/Y during Q3 versus our prior projection of 30%. During its earnings call last week, UPS indicated that its SMB volume in the U.S. increased 18.7% Y/Y with the residential piece up 62% Y/Y and offsetting a 7% Y/Y decline in commercial. The SMB growth rate was UPS’ highest in 16 years and was attributable in part to higher than anticipated revenue growth from its Digital Access Program (DAP), which encompasses its partnerships with technology providers like Stamps.com. Moreover, 150,000 new accounts were added under the DAP and while still relatively small, total DAP revenues are expected to increase 400% Y/Y. Other notable data points with respect to Q3 include a 33% Y/Y increase in eBay’s U.S. Gross Merchandise Value (GMV); Etsy’s 119% Y/Y increase in Gross Merchandise Sales; Pitney Bowes’ e-commerce growth of 47% Y/Y, which benefited from a 150% Y/Y increase in domestic parcel deliveries and a 70% Y/Y increase in digital volumes fueled by Pitney’s shipping APIs; and Shopify’s GMV growth of 109% Y/Y. Even with the hike to our Q3 estimates, we suspect there is still room for upside as our assumptions for new subscriber adds and UPS-related revenue on a sequential basis remain relatively conservative and unchanged.

Whether the outperformance in Q3 can be extrapolated further into the future is equally, if not more, important than a strong print. In this regard, volume growth is expected to moderate on a sequential basis although each of the aforementioned companies expects a record peak season due to the accelerated shift of retail sales to digital channels. UPS noted that the 2020 peak season will have two more operating days than last year as well as two full weeks between Cyber week and Christmas week, which should support solid volume growth. DHL Express expects its e-commerce volume growth to accelerate from 35% year-to-date to over 50% for peak. eBay anticipates low double-digit volume growth in its Marketplace business, which we surmise implies a higher rate for the domestic business somewhat offset by lower growth internationally given its company-specific dynamics in Q3. Etsy expects a 65%-85% Y/Y increase in GMS during Q4 and noted that October GMS trends were similar to September. With all this in mind, we now model a Q4 scenario in which shipping volumes increase 30% Y/Y versus our prior assumption for growth of 25%. This in turn takes our new FY ’20 estimates above management’s prior guidance. While we would typically refrain from raising our Q4 projections at this juncture, particularly given management’s penchant for conservatism, the ongoing pandemic and a highly divisive election season in the U.S., the potential upside in Q3 coupled with an earlier start to peak season provides us with a higher degree of confidence that management’s outlook for the year is set to move higher. As for what that outlook could entail, we surmise FY ’20 revenue and adjusted EBITDA guidance in the range of $750.0 million and $250.0 million, respectively, is plausible and would mark a meaningful increase from existing guidance for $650.0-$725.0 million and $180.0-$240.0 million. With many retailers running promotions earlier this year due to anticipated carrier capacity constraints during peak and Amazon announcing that 3rd party sellers saw sales rise 60% Y/Y during last month’s Prime Day in the U.S., we think a strong start to the quarter should also bolster management’s willingness to raise guidance despite the ongoing macro uncertainty. Beyond Q4, the accelerated shift to e-commerce shows no signs of abating, and we are therefore increasing our FY ’21 projections too. That said, our estimates continue to reflect a degree of conservatism as we assume shipping volumes decline double-digits in both Q2 and Q3 against the extraordinary growth seen at the outset of the COVID-19 pandemic.

Exhibit II: Q3 ‘20 Earnings Preview

In accordance with our higher estimates for this year and next, we are raising our price target from $346.00 to $358.00. We continue to derive our price target based on a FY ‘21 EV/EBITDA multiple of 25x. Near-term, we expect a “beat and raise” to serve as a catalyst for shares. Taking a longer view, we believe Stamps.com remains well positioned to capitalize on positive e-commerce trends both domestic and abroad, which should provide a substantial runway for growth. Despite the obvious near-term tailwinds and favorable secular trends fueling the company’s business, shares of Stamps.com remain attractively valued and trade at a significant discount to other e-commerce enablers and software companies boasting strong growth. As such, we see significant upside in shares and believe investors would be well served by buying the stock here.

Our report with model and disclosures is available here.

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).