Small business service provider Vistaprint (Nasdaq:VPRT) is the gift that keeps giving for both market traders and financial writers. This stock seems to swing wildly between enthusiasm and dejection, a response no doubt due in part to the company's changing business model and the significant risks inherent in the current strategy. While Vistraprint is a consummate second-chance stock, right now does not look like the best time to take a flyer on this name.

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The Third Quarter Looked Smudged
Although Vistaprint's stock did well in the immediate aftermath of the earnings announcement, that may have been due in part to relief that the company met numbers and did not lower guidance again. The results that the company actually reported did not seem so worthy of such enthusiasm.

Revenue rose 25% as reported, or 20% on a constant currency basis. Growth was stronger overseas (up 25% outside the U.S.), with Asia showing very good growth. This growth was fairly consistent with recent quarters, though, so it does not look strong enough for the company to recapture growth stock multiples. (To know more about growth stocks, read Steady Growth Stocks Win The Race.)

Profitability was not so encouraging, though the company had warned of this. Gross margin was basically flat, while operating income dropped 21% and operating margin slipped below 5%. Margins were thumped by a 33% increase in marketing and selling expenses as the company rolls out an aggressive marketing and customer service expansion initiative.

Metrics Are So-So
For the fiscal first quarter, Vistaprint said that it had acquired 1.9 million new customers. That's nearly 16% of the trailing 12-month customer base, but only represents a modest uptick from the 1.8 million adds of recent times. That certainly does not make the marketing initiative a failure, but it does highlight that it's not going to be any sort of quick-fix situation.

Order volume did rise about 18% this quarter, and average order value rose about 5%. Even allowing that new customer adds could goose these figures a bit (and these customers may have come in on promotion offers and won't re-order), Vistaprint is not doing so badly against a backdrop of a very difficult environment for small/medium-sized businesses.

Waiting For Validation
One of the issues with Vistaprint today is that the company is spending a lot of money today on marketing efforts that may, or may not, pay off many years in the future. It is certainly possible that these moves will build this into a multi-billion-dollar revenue company in five or so years; it's also possible that it's money going more or less down the drain to no great effect. And since none of us will know until we know, that means more volatility in the stock. (To know more about volatility, read Volatility's Impact On Market Returns.)

Friends in Good Places
It certainly does not hurt Vistaprint that FedEx (NYSE:FDX) and Staples (Nasdaq:SPLS) are allies and not rivals. After all, small-business services are a logical add-on for companies like Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX) and they are physically present almost everywhere small businesses are. Likewise, it is not so hard to imagine Amazon (Nasdaq:AMZN) or Intuit (Nasdaq:INTU) offering their own alternatives or crafting partnerships to offer similar services.

That said, it does not change the fact that this can be a brutally competitive business. Basic services like business card or stationary printing can be had almost anywhere, and it is likewise not hard to find small businesses willing to create customized promotional materials like calendars, t-shirts, signs and so on. The key for Vistaprint, then, is to offer customers superior value and service over the local print shop. It sounds easy, but there is a reason that this market is so highly fragmented.

The Bottom Line
Vistaprint has rebounded sharply since the last quarter, and taken a lot of its value with it. If this marketing and service expansion project succeeds, there is no question that the stock is cheap. Prudence suggests, though, that investors should include at least some percentage chance of value and that means the stock is a more equivocal buy today. If history is any guide, investors will get another chance to buy this stock at a more compelling valuation.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.