Flat earnings make Stamps.com hard to like


Bobby Raines 05/05/2014

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 train .

Not all companies are this easy to understand though. Take Stamps.com ( STMP ) 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 customers.

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 numbers.

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 2013.

Chart courtesy of stockcharts.com

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% downside protection.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options

Referenced Stocks: STMP



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