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Stamps.com: A Lousy Piece Of Ship

Summary

In 2015, Stamps.com was investigated by multiple government authorities for false and misleading advertising practices and never disclosed these investigations to investors.

Stamps.com already has an egregious ~40% customer churn rate and the terms of the settlement appear to make it much harder for the company to attract and retain customers.

As a result, we think Stamps.com is going to be left with insurmountable customer attrition as the government settlements force the company to modify its predatory marketing tactics.

Management’s recent decision to stop disclosing churn suggests management is aware the business is going to significantly deteriorate given that the disclosure change came "coincidentally" right after a California settlement.

UPDATE: PBI just launched (April 26) a new product that has been designed to crush Stamps.com and that completely shatters the ONLY credible bull case on Stamps.com (ShipStation).

As readers who have followed the Friendly Bear's work on BOFI will know, we specialize in dumpster diving for hidden litigation. Companies go out of their way to cover up bad news, and the biggest skeletons in the closet are often buried away in court documents that regular retail investors cannot get their hands on. Our work on Stamps.com (NASDAQ:STMP) has spanned several months and we believe that we are on to something big - with the stock having at least 50% downside in the near-term and 75% downside in the longer-term, as a result of a busted business model that is about to see competitive dynamics intensify meaningfully, a flawed M&A strategy, and a series of undisclosed government investigations/settlements that we believe are all likely to severely limit the company's ability to grow revenues beyond 2016. We think the revelations in this report (that we believe management has been keeping hidden from investors) have the potential to send this stock plummeting.

Specifically, we believe that our work shows that at least until the company comes clean about its 2015 government investigations/settlements and related business model modifications, its earnings guidance and financial statements cannot be taken seriously.

Source: Seinfeld, Friendly Bear Graphics

UPDATE AS OF 4/27/16: We started investigating Stamps.com months ago when we started to suspect that the company is largely a credit card auto-renewal scheme that delivers zero value to customers. When we were about to submit our publication to Seeking Alpha, we got caught with a grand surprise - a rare gift from the short selling gods. Pitney Bowes (NYSE:PBI) announced a new product called "SendPro" on April 26. In a rare move, Pitney Bowes actually called out Stamps.com in its press release. The press release makes it quite clear that PBI is going after Stamps.com's customers including offering Stamps.com customers very aggressive extended free trial options in order to switch. We are confident that PBI is making every effort to destroy Stamps.com based on the tone of the announcement. Up until this announcement, the only credible bull case on Stamps.com was the ShipStation acquisition which appears to have been a home run for the company. That bull case has now been shattered by Pitney Bowes which has made it clear that it is going after Stamps.com. We think our research already uncovered significant and material disclosure problems at STMP (see below) that are likely to land the company in the crosshairs of more government regulators in the near-term, and we think that this news out of Pitney Bowes will destroy any concept of ongoing terminal value in Stamps.com's business model. PBI could easily take all of Stamps.com's customers at this stage, especially given the litany of consumer complaints online. Readers should also keep in mind that STMP has about 5% of the revenues of PBI yet 25% of the enterprise value. In our view, Stamps.com has never had any economic reason to exist, and the PBI announcement makes the risk of the company going away all the more real. PBI also simultaneously announced that they are opening up their USPS API to 3rd party shipping businesses. Stamps.com previously had an effective monopoly here (due to its acquisition of Endicia), but that monopoly has now run its course due to both PBI opening its API up as well as Shippo getting granted a right to USPS integration (see later in this report). In other words - Stamps.com has even less economic reason to exist today than ever. While 1Q results could look OK given the competitive entry came in April 2016, it is becoming increasingly clear to us that this company is going to fall apart in short order due to a combination of undisclosed government settlements (see below) and rapidly intensifying competition.

PBI Press Release on SendPro from 4/26/16

Source: Pitney Bowes

Situation Overview

Stamps.com is the self-proclaimed leader in PC postage, claiming to have over 500,000 subscribers that pay monthly subscription fees in the range of ~$15.99 per month. These subscription fees entitle Stamps.com customers to print USPS postage from their home PCs. This $15.99 does NOT include the cost of postage - the $15.99/month is only for the right to print postage. The company also more recently made a series of acquisitions that diversified it into more of an e-commerce multi-vendor solution provider (primarily through the acquisition of ShipStation).

The company was a busted 90s VC-backed IPO that languished as a forgotten microcap for years, but has now magically become a ~$1.5 billion tech "darling." The company is the epitome of a Web 1.0 business model (inkjet printing meets AOL-style credit card auto-renewal gimmicks) yet bulls are valuing this stock as if it is an open-ended growth story.

Source: Bloomberg data for stock price chart

It is no secret that USPS postage volumes are in secular decline. Mail volume is down over 20% since 2011. Yet somehow in the same period, Stamps.com has seen its revenues more than double and its stock price rise over ~300%.

Stamps.com's meteoric rise would be exemplary for any company, but is even more incredible in light of the fact that Stamps.com readily admits in its own SEC filings that its business model has no reason to exist!

Source: Stamps.com 2015 10-K

Emphasis:"But the services and features available at USPS.com are provided without service fees, creating a disadvantage for us because we typically charge service fees in our business model."

Translation: Only a sucker would ever knowingly pay for a Stamps.com account because you can do the same thing for FREE DIRECTLY through USPS's website.

Stamps.com's crappy and useless product (in our view) results in an insanely high ~40% churn rate (i.e. a loss of almost half their customers annually), requiring the company to constantly find new suckers to buy the service in order to keep the revenue engine humming.

In fact, the only credible bull case on the stock to date has been the company's shift into e-commerce through the ShipStation acquisition, but given the recent PBI and Shippo announcements, we believe the entire basis for the bull case on Stamps.com has been rendered totally and utterly irrelevant.

What happens if that churn rate spikes even higher? How long would it take for Stamps.com to run out of new suckers to keep its revenue growth illusion alive? What happens when Stamps.com can't tuck in acquisitions to keep investors from finding out the truth about its anemic organic growth?

Thanks to recent government legal/investigative actions from the State of California and the State of Florida (that you will find FIRST here in this report and that were NEVER disclosed by Stamps.com in SEC filings) we think Stamps.com investors will find out the chilling answer to that question very soon.

Links to:

Our research spanning months into undisclosed Stamps.com government settlements leads us to believe that this stock is about to plummet back to the trading range where it languished for over a decade. Our near-term price target is $50 and longer-term price target is $25.

Based on our review of disclosure requirements surrounding government investigations, we believe that Stamps.com has failed to disclose material government investigations/settlements to investors, which we believe is materially misleading and in violation of Item 103 of Regulation S-K. Based on the lack of disclosure, we believe that this stock is fundamentally uninvestable at least until the company comes clean about the implications of its 2015 settlements with government agencies.

We expect that over the next few months, Stamps.com is going be left with massive customer attrition and negative revenue growth as new governmental orders force the company to cut back on its questionable marketing tactics causing the churn rate to skyrocket. Our research has also led us to question whether or not Stamps.com is actually in compliance with 2015 legal settlements as we show later in this report.

Aggressive and Questionable Marketing Tactics and Auto-Renewals Mask Weak Underlying Trends

Stamps.com aggressively markets "free trial" offers to prospective customers through a variety of channels (paid search, late night TV ads, and direct mailers), and requires customers to provide credit card data in order to sign-up for the free trial. However, like with many e-commerce companies, the terms of the "free trial" are buried so deep in the fine print that customers often miss the key stipulations. The "free trial" also requires customers to remember to cancel their subscription or...


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