I spend a lot of time talking about companies and their stocks
in this space. Most of the time, the discussion is about why I
think the stock may go up or down. I don't typically spend a lot
of time on existential questions like what a company does or how
it makes money, because usually, those things are pretty obvious.
Starbucks sells coffee and snacks
CSX charges companies to move their goods by
Not all companies are this easy to understand though. Take
) for example, the company essentially sells postal services
online, allowing users to avoid a trip to the Post Office and
print their postage at home.
How does the company make money though? Stamps.com couldn't
stay in business if it bought postage from the Post Office and
then resold it at a mark up, it seems like it wouldn't provide a
very good alternative to the Post Office.
It turns out that Stamps.com makes money in two ways. First,
users pay a monthly subscription fee, which varies based on which
of the company's suite of services they take advantage of. The
company caters to small and medium-sized businesses and as such
offers a variety of services to cater to that clientele. The
company also sells shipping supplies to its customers.
Interestingly, the company is a heavy advertiser on talk radio
and podcasts. There may be other advertising I'm missing because
the company says that it spent about $121 per new customer in the
first quarter of 2014. That figure has been above $100 since
2009, so that doesn't seem like a one-time spike in spending.
Some of those acquisition costs likely also include items like
the free scale and shipping items the company provides to new
That number is important though, because the company says it
gets, on average, revenue of $21.45 per paid customer in the
most-recent quarter, that figure has been relatively stable since
2012. This means that each new customer has to stay with the
company for more than five months before the company makes a
penny from their subscription. With margins typically a little
above 75%, it doesn't take too much more than five months, but
that still seems like a long time. The company only loses a
little more than 3% of its customers on a monthly basis, so most
customers do stick around long enough to be profitable, but the
relationship between those figures is important.
The company gave its most-recent quarterly report on May 1 and
the results were weak. Earnings and revenue both missed
estimates. Look forward the company's estimates for fiscal 2014
were in-line with expectations, so apparently the company doesn't
expect the first quarter's weakness to continue.
The company set new records for postage revenue and paid
customers in the first quarter, but that came with increase
spending on sales and marketing. I can appreciate the company
having to spend money to make money, but I'd like to see record
subscriber number and revenues turn into better earnings
Of course, I'd also like to see the company's earnings
increase, but neither the company nor analysts are really
expecting that to happen. The company expects to earn between
$2.10 and $2.50 per share on a non-GAAP basis in fiscal 2014,
while the mean analyst estimate if for $2.31 per share. That's
actually down from $2.39 per share that the company earned in
The stock had been trading lower for months before this
report, but soft earnings pushed the stock below $30. For some
context, it had been at nearly $50 in November.
Traders who don't see much upside to Stamps.com could consider
an Aug. 35/40 bear-call spread for a credit of about 50
cents. The spreads are a little wide on these options, but we
should be able to take a little from each side and still get
filled. This position will return a full credit so long as the
stock is below $35 at August expiration, giving it about 18%