Strong Finish to a Strong Year

Stamps.com (STMP) delivered Q4 ’20 results ahead of expectations, capping a year of resurgent growth fueled by the COVID-19 pandemic. Most surprising (and impressive) from our perspective was further acceleration in the company’s paid customer growth rate to 35% and a corresponding decline of 15% in the cost per acquired customer. Our only disappointment was that the upside in Q4 wasn’t greater as we had thought growth in customer postage printed would outpace the 30% increase underlying our assumptions and by extension, contribution from Stamps.com’s USPS-related partnerships would exceed our projection. Ultimately, the metric increased at a rate commensurate with our forecast, so the results were just slightly ahead of our estimates.

That our model outputs relatively accurate results with the proper inputs is worth noting, however, as management followed the lead of others that have benefited meaningfully from the COVID-19 pandemic and opted not to issue formal guidance for FY ‘21. Per management, the scenarios to consider would yield an unacceptably wide range of outcomes, thereby reducing the value of guidance to investors. We prefer this approach to putting forth overly conservative guidance that is dismissed outright by investors or worse, raises fears that something may be amiss. For those concerned by the lack of guidance, we note that simply taking the paid customer count exiting FY ’20 and multiplying it by the pre-COVID average monthly revenue per customer reported in Q1 ’20 yields annualized revenue of $775 million, a level consistent with consensus expectations heading into the print. Given that management highlighted strong growth of 50% Y/Y and 40% Y/Y, respectively, in new customer acquisition and shipping volumes during January, and plans to increase operating expenses by 20% or more in FY ’21, we think the baseline expectation should be for some growth this year and more in the years to come.

We raise our FY ’21 and FY ’22 revenue estimates to reflect higher growth in the paid customer count than we previously assumed. As we expect the company to invest aggressively to acquire new customers, to capture a nascent international opportunity and to strike more partnerships, the increase in our top line projections has no material impact on our adjusted EBITDA estimates. Our price target also remains unchanged at $358.00 based on a FY ’21 EV/EBITDA multiple of approximately 25x. Stamps.com now processes over $8 billion in postage on behalf of the USPS, another $5 billion in shipping volumes across all other U.S. carriers and over $5 billion internationally. Management estimates that total GMV processed across the company’s solutions comprises 5% of global e-commerce and 15% of U.S. e-commerce. In our view, Stamps.com’s market leadership in the multi-carrier software solutions market is underappreciated and the stock has ample room to run.

Exhibit I: Reported Results Versus Expectations

Q4 revenue was $206.0 million (+28.0% Y/Y), exceeding guidance for $153.0-$183.0 million, our estimate of $204.4 million and consensus of $194.3 million. Relative to our projection, the upside was attributable to higher than anticipated service revenue, which totaled $195.6 million (+32.6% Y/Y) and benefited from another strong quarter of growth in both paid customers and shipping volumes. Product sales of $5.7 million (+9.4% Y/Y) were marginally lower than our $5.9 million estimate, while Insurance sales of $4.7 million (+44.5% Y/Y) were modestly above our $4.4 million forecast.

Turning to the company’s key customer metrics, the paid customer count reached 1.016 million (+35.4% Y/Y), easily exceeding our estimate of 988,000 as robust growth in gross customer adds more than offset higher churn. Average monthly churn rose 130 basis points Y/Y to 4.5%, which management attributed to a normal drop-off in mailing customers added early on in the pandemic. Average monthly revenue per customer (ARPU) was $67.61 (-2.5% Y/Y), slightly below our $69.00 estimate due to the substantial increase in subscribers added during the period.

Gross margin was above our assumption due to higher service revenue, while operating expenses were in line with our estimate. As a result, both adjusted EBITDA and non-GAAP EPS surpassed our estimates and consensus. We note that non-GAAP EPS beat by a far more substantial margin due to a tax benefit recorded in the quarter. On an apples-to-apples basis, non-GAAP EPS would have been $2.73 versus our estimate of $2.63 and consensus of $2.62.

Citing a wide range of potential outcomes that made providing guidance untenable, management refrained from issuing specific financial targets for FY ’21. We note that other companies levered to e-commerce like Shopify and UPS have also withheld guidance in favor of more qualitative commentary on the drivers of growth. In this regard, management highlighted robust but decelerating growth in customer acquisition and shipping volumes to start the year and acknowledged the potential for revenue growth to turn negative as comparisons become more challenging in Q2 and beyond. That said, shipping volumes are the primary determinant of growth this year, so to the extent e-commerce marches higher, so too should Stamps.com’s business. As illustrated earlier, a back-of-the-envelope calculation based on the existing customer count also points to growth consistent with Street expectations heading into the print.

Exhibit II: Estimate Revisions

Our revenue estimates increase for this year and next based on higher projections for subscriber growth partially offset by a decline in our ARPU assumptions. Reflecting management’s plans to increase operating expenses by as much as 20% or more, our estimates for research and development as well as sales and marketing move markedly higher. Our adjusted EBITDA estimates are therefore virtually unchanged but our non-GAAP EPS estimates increase due to a lower assumed tax rate.

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).