For as long as small business marketing specialist Vistaprint (Nasdaq:VPRT) has been on my watchlist, it has been an unusually volatile stock. That's not so unusual for a stock that frequently trades at such rich valuation multiples, but it also seems to reflect a fairly twitchy investor base for this company. While the idea of a pure-play service company targeting small-to-mid-sized businesses is clearly appealing, it seems that nobody really has a good sense of what constitutes a "fair" price for the enterprise.
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A Good End to the Year, But...
Vistaprint ended its fiscal year with 27% reported revenue growth, and 20% growth on a constant currency basis. That compared pretty favorably to analyst expectations, and 17% order growth was a solid number (as was the 68% of business coming from repeat customers).
Profitability was also fairly good. Gross margin moved up slightly (by about 30 basis points), and the company saw 22% growth in reported operating income. Marketing spending was ahead of sales growth and this took some of the operating margin leverage away, though other expense items were up significantly as well. Vistaprint once again delivered strong cash flow growth as well - operating cash flow was again roughly double the level of reported net income, and a sharp drop in capex improved free cash flow.
... Guidance Crushes the Stock
Vistaprint's reported numbers were fine, but the company's guidance sent institutions into a tizzy. Citing a desire to launch a "long-term investment strategy" to stimulate future growth, Vistaprint management revised its earnings guidance sharply lower. While the company talks about this as an "investment" strategy, the accountants are going to treat it as a spending binge - expanded TV marketing, more call centers, distribution facilities, and new target markets will all depress earnings.
On some level, this plan makes sense. Vistaprint largely competes with a motley collection of small local businesses, online companies, and huge corporations like FedEx (NYSE:FDX) and Office Depot (NYSE:ODP) that offer services like business card printing or banners as an ancillary service. Accordingly, there is an opportunity here for Vistaprint to really brand itself as the go-to option.
On the other hand, analysts and investors were already expecting quite a bit of growth from this company. If management feels that it needs to spend this much money to produce just a modest boost in growth from what was already expected, it largely forces investors to re-evaluate the growth potential of the business and the appropriate multiple for the stock.
Scarcity Value Is Real
There is an undeniable attraction to what amounts to a pure-play on small/mid-sized businesses. Even granting that these are not easy times for small businesses (the business recovery has been more of a major corporation phenomenon so far), it is an attractive market for the long-term.
Amazon (Nasdaq:AMZN) has its affiliates program and eBay (Nasdaq:EBAY) has its eBay Stores program. Likewise, companies like LinkedIn (Nasdaq:LNKD), Intuit (Nasdaq:INTU) and Demand Media (NYSE:DMD) all cater to smaller businesses in one way or another, but none are as focused on the segment as Vistaprint and most of the companies offer fairly solid services as opposed to Vistaprint's more comprehensive marketing services.
The Bottom Line
Investors who've spent much time around smaller businesses have probably noticed that marketing is a major deficiency for many of them. That spells out a real opportunity for Vistaprint. The trouble for investors is figuring out whether or not management's new strategy is really additive to growth or a sign that the growth potential of the company was already starting to peter out.
Investors who think Vistaprint is still looking at several years of double-digit revenue growth and improving margins (after the increased marketing expenditures reset them lower) are looking at a very attractively-priced stock. By no means is this a low-risk proposition, but for a company with little direct (or at least focused) competition and strong growth potential this looks like a worthwhile risk for aggressive investors. (For additional reading, check out 4 Steps To Building A Profitable Portfolio.)
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