Relatively obscure, small e-postage company Stamps.com (NASDAQ:STMP) burst onto Wall Street’s radar in July after Citron Research tweeted that the company may be acquired by the market’s favorite e-commerce company, Shopify (NYSE:SHOP).
Specifically, STMP stock popped about 10% after Citron tweeted that Shopify could buy Stamps.com in an all-stock deal which values the company at $400 per share.
At the time of the tweet, STMP stock was trading around $220.
Needless to say, if Shopify does acquire Stamps.com at $400 per share, then STMP stock has a lot of upside potential over the next few months.
But will it actually happen?
Maybe. At the very least, the deal makes a lot of sense, and the timing is perfect.
Why Shopify May Buy STMP Stock
To be clear, there really isn’t any chatter on the Shopify buying Stamps.com front outside of the Citron tweet.
But the market is reacting so positively to the tweet – STMP stock is soaring – because such a deal would make a ton of sense in the current environment.
Amid the novel coronavirus pandemic, everyone who sells anything is pivoting their operations online. Physical stores are closed in most places. Where they are open, they are seeing lower traffic volumes. Thus, the only way for retailers and merchants of any size to survive these turbulent times is to pivot online and sell through their own websites, third-party marketplaces and social channels.
Shopify provides a wide portfolio of tools which help businesses make this pivot into online commerce. Such tools include the ability to:
- Create an e-commerce enabled website.
- Sell anywhere online, including through marketplaces and social channels.
- Create, execute and analyze digital marketing campaigns.
- Manage orders, shipping and payments.
- Tap experts for advice on everything from online store set-up to SEO.
But the one thing that Shopify doesn’t offer is the one thing that Stamps.com is the best-in-the-business at: postage.
And, importantly, without postage, the e-commerce market doesn’t work. After all, every package needs postage of some sort in order to ship from seller to buyer.
So, if Shopify wants to truly build an all-in-one, end-to-end e-commerce solutions platform, the company needs to build out a postage a business.
Or buy one like Stamps.com.
To that end, Shopify buying Stamps.com may just be a rumor today, but the logic behind the deal is strong enough that such rumors could turn into action soon.
What to Do With STMP Stock
If Shopify does buy Stamps.com, the acquisition will happen a significant premium to the current STMP stock price.
STMP stock trades around 7x trailing sales. Other e-commerce service stocks, like a PayPal (NASDAQ:PYPL) or a Square (NYSE:SQ), trade around 12x forward earnings. Meanwhile, SHOP stock trades at 66x trailing sales.
Clearly, there is ample wiggle room for the valuation on Stamps.com to expand to more market-average levels, and those market-average levels is likely where Shopify would buy Stamps.com.
But, let’s remember, such a deal is mere speculation today. Buying and selling STMP stock based on this speculation is unwise.
So where should STMP stock trade absent an M&A catalyst? Around $225.
My numbers indicate that, assuming Stamps.com leverages burgeoning demand for quick and easy e-postage solutions to drive 5% to 10% revenue growth over the next several years and concurrently turns scale into positive operating leverage, the company’s earnings per share will rise towards $15 by 2030.
Based on an application software sector-average 35x forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for STMP stock of $225.
Bottom Line on STMP Stock
Shopify may buy Stamps.com. If so, STMP stock will soar.
But such chatter is just speculation at this point. And STMP stock has soared into valuation territory that’s not supported by the fundamentals, and only supported by M&A chatter.
Consequently, I wouldn’t chase this rally in STMP stock until there’s further confirmation to the M&A rumors.
That is, if the “Shopify is going to buy Stamps.com” train gains credible momentum, then buy into the STMP stock rally.
If it doesn’t, continue to stay away. Wait for shares to drop back towards $200. Then buy the dip.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SHOP and SQ.
