Is Stock a Hopeless Investment After Disappointing Guidance? rewarded the bears who bet against the company when it said it lost a major customer.

Over a one-day period, (NASDAQ:STMP) stock has lost nearly 60% of its value. Markets reacted to the full-year revenue guidance and GAAP net income coming in below analyst expectations. Ahead of the earnings report, valuations in the application software company were modest. To their credit, bears who bet heavily against STMP stock will get rewarded following the earnings report.

STMP Stock: Is a Hopeless Investment Now? stock had been on a steady downtrend since peaking in July 2018. When the stock finally bottomed in December at $141, the 40% stock appreciation was due to stock markets rebounding from the bear market.

STMP reported earnings consistently growing in the double-digits in the last five years, but with the light outlook for this year, what should STMP stock investors do next?

STMP: A Strong Fourth-Quarter Report reported revenue growing 28.5% to $170.2 million. Non-GAAP earnings-per-share came in at $3.73, while GAAP EPS was $2.30. STMP’s CEO said the company achieved strong results in the fourth quarter because it executed on its shipping business. Its acquisition of MetaPack strategically positioned the company to compete globally. Earnings and revenue both beat consensus for the fifth straight quarter in a row, even after accounting for the $7.2 million non-cash stock-based compensation expense. The company also bought back 531,000 shares in the period at a total cost of around $88.5 million.

Fiscal Year 2019 Outlook

According to BusinessWire, the company posted the following summary of its business outlook:

  • We expect total revenue to be in a range of approximately $540 million to $570 million.
  • We expect GAAP net income to be in a range of approximately $55 million to $69 million.
  • We expect GAAP net income per fully diluted share to be in a range of approximately $2.86 to $3.76.
  • We expect our 2019 effective tax rate to be 30.0%.

Analysts expected total revenue of $689 million, so the $540 million outlook at the lowest point comes as a shocker to the market. At a GAAP EPS as high as $3.76, STMP stock traded at a forward price-to-earnings ratio of 53X at a $198 share price. But at $102, the forward P/E drops to 27X.

Reasons for Downside Guidance lost a major account in the quarter and validated the bears’ bet against STMP stock with their 14.5% short float. The company said that its exclusive partnership with the U.S. Postal Service is now over. This will cost $130 million in revenue. After the stock price drop, the 27x forward P/E looks “okay” if the company manages to win new customers in the year. Still, with this sharply lower guidance, the fair value is nowhere near the $174 average price target that analysts have on the stock. Expect analysts to lower their expectations for the company and to lower the price target in the $70 – $150 range.

Risks stock is not a very heavily traded stock, so the lack of liquidity will lead to wide price swings. The company’s exclusive contract loss with USPS will damage earnings, revenue and profit margins for 2019 and potentially for a few years after that. Although Applied Optoelectronics (NASDAQ:AAOI) is in a completely different market, this firm also lost big customers and has yet to recover from it. AAOI, which was once valued in the billions by market capitalization, now trades at a $280 million market cap.

STMP could be at the start of a long bearish phase, as markets adjust to the lack of revenue growth for years to come.

Bottom Line on STMP Stock

Markets are unforgiving when a growth company loses a major customer and revenue suddenly decelerates. For, the over 40% drop in after-hours trade could be a start. Bottom-fishers may want to wait a few days before betting on a short-term bounce. Investors with a longer time horizon should wait for the company to announce new account wins that replace the lost business. Without any evidence of a turnaround, buying STMP stock at this time is really a pure gamble.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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