BW ONLINE DAILY BRIEFING
STREET WISE by Sam Jaffe
April 7, 1999
Forget Amazon and eBay. Think
PostOffice.com
Old and stodgy the Postal Service may be. But imagine if it
became a Net IPO
E-commerce is like a siren, luring investors to the
rocky shoals of Internet-stock mania. What could be
more alluring, after all, than the promise of an entirely
new retail sector whose growth potential is enormous
and whose best players are nimble newcomers with
expertise in server-farm management and
order-fulfillment, instead of inventory turnover and
employee theft-reduction. That's why stocks such as
bookseller Amazon.com (AMZN) and clothing retailer
Bluefly (BFLY) have been awarded such rich market
multiples.
What investors often overlook in their thirst for a sip of
the E-commerce nectar is the thing that makes
E-commerce so appealing to consumers: It's cheap. In
fact, just about the only way to succeed as an
E-commerce retailer is to reduce your margins to
microscopic levels. It's just too easy for another upstart
company to set up a competing Web site that cuts your
prices to the bone. Even Amazon, with its world-class
brand name, can never raise prices substantially
because it would be too easy for other booksellers on
the Web to undercut it.
If margins can never be inflated, the best an investor
can hope for is that an E-commerce company will
create enormous volume so that it can generate enough
cash from its puny margins to prosper. Forget about
ever finding an E-commerce retail company that earns
the traditional 30% gross margins of retail stores.
Does that mean there aren't any E-commerce
companies that can generate big profits? I found one,
but there's one problem: It isn't publicly traded. In fact,
it isn't even a company. It's the U.S. Postal Service,
which in the long run could be the biggest beneficiary of
the E-commerce revolution. There are no plans for a
spinoff just yet. But if the Post Office were on the
NASDAQ, and if it were judged by Internet-stock
standards, it would be a doozy. Here are some
qualities that would make PostOffice.com a winner:
First to Market
Amazon and Barnesandnoble.com have almost exactly
the same offerings and similar service. Why does
Amazon have the lion's share of Web book sales?
Because it got to market first, garnering the
early-adopter crowd and the lion's share of buzz. The
Post Office was first to market, beating its main
competitors, Federal Express (FDX) and UPS, by
about 150 years. Although I couldn't find any
marketing studies to back this assertion, I'm sure that
the Post Office would rank among the top 10 U.S.
corporations in terms of brand awareness -- probably
somewhere between Microsoft (MSFT) and RJR
Nabisco (RJR).
Barriers to Entry
The Post Office is a monopoly. If it were to go private,
that would probably have to change. But it isn't exactly
easy to start up a new postal system. Much of the Post
Office's expenses are fixed capital costs (buildings,
truck fleets, sorting machines) that have already been
paid for. And Post Office employees are highly
specialized and trained. Developing a workforce like
that would take decades and billions of dollars.
Limited Competition
Both Federal Express and UPS are excellent at what
they do: Deliver important packages in a hurry at high
cost. But there's no way they could match the Post
Office's ability to deliver lower-priority packages (such
as most E-commerce purchases) at a slower pace.
Right now, the Post Office's prices are one-third to
one-half of what its competitors charge. You can
expect that advantage to continue.
It's Tax-Free
One of the drivers of E-commerce growth has been a
moratorium on sales taxes, which is due to wear off in
three years. The Postal Service is not, and will
probably never be, taxed. Imagine the public outrage if
politicians tried to tax our stamps.
Diversified Income Stream
The Post Office doesn't have to rely on its seasonal
Internet business for all of its revenues. It can continue
to deliver envelopes, for instance. Although E-mail has
taken a bite out of the volume of personal
correspondence, direct mail continues to grow at
breakneck speed. And the Post Office can count on
that growth for decades to come. Just imagine the
revenues if it began offering a spam mail service.
Committed Employees
The Post Office has one of the largest workforces of
any organization in the world. Postal employees
perform their jobs well now; imagine how efficient they
would be if they had stock options.
Enormous Growth Potential
Let's assume that $1 trillion worth of goods will be sold
via the Internet five years from now. That might seem
like a pie-in-the-sky number, but it is in fact on the
lower end of projections by consultants such as
Gartner Group and Jupiter Communications. Let's
further assume that the Post Office gets half of the
shipping business. Let's put shipping costs on the very
low end: about 2% of a product's price. That means
that the Post Office will have $10 billion in additional
revenue five years from now.
To determine how much the Post Office is worth as a
stock, let's attach Amazon.com's price-to-sales
multiple (33) to the Post Office's Internet sales. That
would give the Post Office a market capitalization of
$330 billion based just on its Internet business. Its
snail-mail revenue would no doubt push the figure
higher. The most valuable company in the world right
now is Microsoft, which is now also worth about $330
billion.
The Post Office's sheer size would force Standard &
Poor's and Dow Jones to include it in their indexes,
which would force index funds to buy the stock, which
would force the price up even more. Don't be
surprised to see the Post Office reaching $500 billion in
market cap a year or two after the IPO. If the
government were to sell its entire stake in the new
company, it could raise enough money to fix Social
Security and Medicare -- and pay off a big chunk of
the federal debt.
Then again, why would the government want to sell
such a huge revenue-generator in the first place? If you
were the sole shareholder in potentially the hottest
E-commerce company on earth, would you want to
sell just as the revolution is gathering steam?
Jaffe writes about the markets for Business Week
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