Raising Estimates and Price Target Ahead of Q2 ’20 Results
Stamps.com (STMP) reports Q2 ’20 results on Thursday, August 6, after the close. Ahead of the print, we are increasing our estimates to reflect the tailwind from a multi-year acceleration in e-commerce growth catalyzed by the COVID-19 crisis. Recall that management previously stated that the dollar volume processed across all carriers increased over 50% Y/Y in April, and monthly data from the USPS revealed a nearly 65% Y/Y increase in PC Postage in May. More recently, Amazon (AMZN), eBay (EBAY), Pitney Bowes (PBI), Shopify (SHOP) and UPS (UPS) have all reported outsized growth driven by peak season-like volumes in Q2. In fact, Shopify noted that its merchants sold 1.5x the amount they sold in Q4 ’19, while Pitney Bowes indicated that its Q2 domestic delivery volumes were over 2x the holiday peak. At UPS, B2C volumes jumped 65% Y/Y in Q2 with volumes in May and June significantly above April. Considering these data points, we believe Stamps.com’s Q2 ‘20 results should easily surpass its own Q4 ’19 performance, at least on the top line.
Exhibit I: Estimate Revisions
Specific to Q2, we raise our estimate of customized postage revenue by $4.0 million to incorporate sales generated in partnership with Last Week Tonight to support the U.S. Postal Service. As all profits will go towards the Postal Employees Relief Fund, the increase in our customized postage forecast has no impact on our adjusted EBITDA or non-GAAP EPS estimates for the quarter. More significantly, we also hike our estimate of service revenue as we expect the explosion in e-commerce sales to translate into higher levels of monetizable shipping volumes. Theoretically, these transaction-oriented revenues should have nominal costs attached and largely drop to the bottom line. However, we assume the company reinvested a portion of the gains in both customer support and sales and marketing to ensure (and perhaps accelerate) subscriber growth over the long-term. Even with the increase in our Q2 estimates, we suspect our revised forecasts may still prove conservative as we have not considered a more bullish but plausible scenario in which PC Postage revenue growth in June accelerated further relative to May. In that scenario, we could see Q2 revenue growth of as much as 35% as opposed to the 30% now reflected in our model with much of the upside flowing through to adjusted EBITDA.
Beyond Q2, significant uncertainty remains with respect to the sustainability of recent e-commerce trends given the ongoing pandemic and high domestic unemployment rates. That said, both Amazon and Pitney Bowes see sequential growth ahead, bucking traditional seasonality in Q3. Others like eBay and UPS also anticipate growth in the latter half of the year albeit at a more moderate rate than in Q2. We are taking a somewhat conservative route and assuming shipping volumes exhibit the typical sequential decline in Q3 before ramping again during the holiday period. However, the baseline from which we derive our 2H ’20 and FY ’21 projections still reflects the massive shift from physical to digital commerce seen to date, and thus results in substantially higher revenue estimates throughout our forecast horizon. Consistent with our Q2 adjustments, we also assume a portion of the higher revenue is reinvested to support future growth. Of course, our estimates have proven overly conservative before and that may again be the case this time around if the e-commerce growth rates exiting Q2 are ultimately sustained for the remainder of the year. For those wondering what sort of numbers might be attached to that scenario, we think revenue and adjusted EBITDA in excess of $730 million and $230 million, respectively would be within reach.
Exhibit II: Q2 ‘20 Earnings Preview
In conjunction with our higher estimates, we are raising our price target from $178.00 to $232.00. Our price target continues to represent an EV/EBITDA multiple of 20x but now applied to our FY ’21 projections. As depicted in the table above, our revised estimates sit well above consensus for Q2 and exceed management’s prior guidance for FY ‘20. With this in mind, we fully expect Stamps.com to deliver Q2 ’20 results considerably ahead of Street expectations and to raise its outlook for the year. If Stamps.com’s recent stock price performance is any indicator, however, our call for a massive beat and raise is no different than the market’s at this point. All things considered, we continue to believe investors should maintain a core position in Stamps.com given the company’s dominant position in the multi-carrier shipping solutions space, strong secular tailwinds favoring e-commerce and potential for further beat-and-raise quarters in the near-term. For those that have benefited from the run-up of late and now have outsized exposure, taking some profits amidst the broader macro uncertainty is also a reasonable course of action, in our opinion.
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).