VistaPrint: The Shorts Could Be on to Something

| About: Cimpress N.V. (CMPR)

We are not into shorting stocks as a dominant strategy now because it’s a little late in the game but were intrigued by the huge short positions at a somewhat well known name. The company is VistaPrint (VPRT).

VistaPrint caters to the needs of small businesses and individuals by offering an array of services from printing business cards to designing web sites. Our problem is in the nature of its business. If you run a Google search on VistaPrint, you will pull up hundreds of other smaller companies offering the same service. This company does not have a moat! It’s just a matter of time before we will see a price war leading to the compression of margins.

The company claims it has over 75,000 satisfied customers to cross sell other services. However, run a search on Google for "VistaPrint Scam" and you will pull up scores of complaints from supposedly past customers who were charged by affiliates when they had not ordered its services. The company's ordering process somehow gets a less alert customer to sign up for its third party membership discount "deals." And in good time the customer finds purportedly "unauthorized" or "unknown" charges on his or her credit card. Some complaints talk of months before these charges are discovered. Many had to have their cards cancelled because there were just too many VistaPrint affiliates who had their card number. Of course there is no way for us to verify the authenticity of these complaints but they are too numerous to ignore.

Here is what the recent 10-Q says:

Between July 29, 2008, and September 11, 2008, a total of seven purported class action lawsuits were filed against VistaPrint USA, Inc., VistaPrint Corp. and/or VistaPrint Ltd., and two third party merchants, in U.S. Federal District Court in six different states, asserting substantially identical claims alleging that the defendants violated certain Federal and state consumer protection laws in connection with the offer of membership discount programs on our website. The plaintiffs allege, among other things, that after ordering products on our website they were enrolled in certain membership discount programs and that monthly subscription fees for the programs were subsequently charged directly to their credit or debit cards, in each case purportedly without their knowledge or authorization. The plaintiffs are seeking recovery of an unspecified amount of damages, including statutory and punitive damages, together with interest and legal costs, and are also seeking to prevent us and the merchants from engaging in similar practices in the future.

While we do not have a case against VistaPrint for its reasonable valuation, we are surely not for its business model, which is being replicated by many. The second and greater area of concern is the innumerable complaints by customers which may not indicate willful fraud but surely indicates a bad business model. The revenue generated by the third party merchant transaction referrals is around 5% and we don't expect this to continue for long if the class action lawsuits prevail against Vistaprint. While the 5% may not be a big number in terms of revenue, it could impact earnings because the margin for such referrals business is very high. An economy in tailspin is surely no help.

While this is not a recommendation to short VistaPrint, it may throw some color on the huge short position.