If you're a nimble trader, you might like Vistaprint (VPRT). These shares have spent most of the last four years chopping between $30 and $60, as the company's inability to perform on a consistent basis has created sharp sell-offs and subsequent rallies. Now the shares are up again on investor's confidence (or hope) that the company's turnaround/self-improvement efforts will lend stability and consistency to the business, and possibly also on confidence that conditions in Europe have bottomed.
I have a hard time sharing this enthusiasm. Although I believe the company has a leveragable edge in its printing operations, I'm not sure that's a dependable long-term growth driver. Likewise, I'm not confident that Vistaprint will emerge as a strong presence in digital marketing for small businesses. Last and not least, serving the small business community is inherently volatile - a large percentage of businesses fail and the constant "flow" of new and failing businesses won't help the company establish a lasting market presence.
Marketing Won't Ever Go Away
One of the few eternal truths of business is that marketing is a cornerstone activity. Vistaprint has about 3% share of a market in North America and Europe that its management believes totals about $30 billion a year. For Vistaprint, most of this consists of printed materials like business cards, brochures, stationary, and signage where the company can offer both online graphics design services and low-cost printing.
I do believe there are some moat-like characteristics to Vistaprint's printing service business. Through its proprietary software and manufacturing process, the company can combine multiple jobs/orders into a single print run - significantly reducing its costs and allowing it to compete quite effectively with other print service companies.
Online competitors will keep the pressure on to keep costs low and a company like FedEx (NYSE:FDX) (currently a partner of Vistaprint) could theoretically become a rival in the future. Frankly, though, I could see print obsolescence as a bigger threat. While the idea of the "paperless office" has certainly been oversold, I expect that core products like business cards will ultimately be replaced (at least in part) by mobile apps. That's likely going to be a slow process, but in the near term the bigger challenge for Vistaprint will be in identifying and securing customers that can provide profitable long-term relationships as opposed to just ordering products when incentivized with steep discounts.
Can Vistaprint Become A Real Player Online?
Digital marketing is another significant part of the long-term story for Vistaprint. Helped in part by the acquisition of Webs, Vistaprint offers a range of website design/hosting and digital (email) marketing services. Thus far, it doesn't appear that these services have really resonated with the target market in a big way, as only a small percentage of the company's active customers use them. Given that Vistaprint paid a pretty steep price for Webs, that's not particularly encouraging.
Worse still, I think the digital marketing space is exceptionally competitive and I don't know that Vistraprint really has the means of standing out from the crowd. Web.com (WWWW) and Go Daddy are targeting many of the same customers, and while I believe companies like Constant Contact (NASDAQ:CTCT) and Adobe (NASDAQ:ADBE) are aiming for much larger customers than Vistaprint's core market, the SaaS model they use could allow them to market down-market without much incremental inconvenience. I also believe that companies like Intuit (NASDAQ:INTU) and Paychex (NASDAQ:PAYX) may ultimately enter the space somewhere down the line as well; Intuit has recently recommitted to its core legacy operations, but both companies are likely going to want to find ways to grow their share of wallet with existing customers.
Non-Business Operations - Real Opportunity, Or Distraction?
Vistaprint is also looking to generate profitable growth from personal/family printing services. Rival Shutterfly (NASDAQ:SFLY) has characterized this as a $35 billion market opportunity, and Vistaprint did acquire Albumprinter (a European photo services company). The challenge here is not unlike the challenge in its larger business services operation - both establishing a real brand identify/value and creating a lasting value proposition for customers that can underpin a real business.
Will This New Plan Meet Investor Expectations?
Realizing that operating performance was not good enough, the company launched a fairly comprehensive plan to reorient the basis. As of the last month or two, management believes that it has implemented about 40% of the changes it wants in North America, though Europe is much further behind.
This plan makes sense in many respects. The company has reinvested in manufacturing, product quality, and customer service, and has made a deliberate effort to move away from disloyal price-shopping customers and focus instead on those customers that can generate better long-term value through higher retention and a greater appetite for Vistaprint's services - in other words, buying more than just business cards when offered significant discounts.
Europe is likely to take more work. I'm troubled at some of the problems that have set back the company, including serious localization issues (focusing on North American styles/sizes instead of the European norms), particularly given that senior management is based in Paris. Likewise, while the company's decision to retrench around its top three European markets makes sense from the perspective of better leveraging marketing spending (and improving margins), I do wonder about the long-term growth impact.
Although Vistaprint's superior printing operations allow it to post gross margins about double the norm, I'm still troubled by the inconsistency of results here. Management has already pulled back from some of its long-term goals, including $2 billion in organic revenue in FY2016. So while I am willing to model nearly 9% revenue growth and 18% free cash flow growth, I have to acknowledge that there are some definite downside risks to those numbers (particularly the margin numbers, in my opinion).
The Bottom Line
I happen to believe that 18% free cash flow growth is a pretty robust target, even if recent results are depressed and below-trend. So given that such a projection still only leads to a price target in the high $40's, I'm not terribly excited about the stock today. Moreover, given the company's demonstrated volatility (and the recent run), I would be nervous that a quarterly earnings miss would send the shares down sharply. I don't think that's a good risk/reward tradeoff, and I'm content to stand on the sidelines, even if that means missing out on the upside to the company's restructuring efforts and a European business recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.