The Royal Mail (LSE:RMG) share price momentum throughout 2020 and 2021 seems to have fallen flat on its face. The UK’s oldest delivery service enjoyed tremendous tailwinds during the pandemic, as demand for parcel delivery reached record highs. Unfortunately, the bullish trends seem to have ceased, and the stock has since fallen by around 35% since the start of the year.
Is this decline justified? Or is this actually a buying opportunity for my portfolio? Let’s investigate.
The share price vs an economic slowdown
With physical retailers reopening their doors, e-commerce sales have declined. According to the Office for National Statistics, online sales as a proportion of total retail spending currently stand at 26.1%. By comparison, this figure was closer to 37% at the start of 2021.
What does this have to do with Royal Mail’s share price? With management shifting strategy to focus on parcel delivery, the rise and subsequent fall in e-commerce sales have directly impacted the group’s revenue stream.
Looking at the latest trading update, domestic parcel volumes have started to fall, taking the top-line income down in the process. And with macroeconomic factors placing additional pressure on consumers, this downward trend may be set to continue.
Combining surging inflation, rising interest rates, and skyrocketing energy bills doesn’t exactly create a favourable consumer spending environment. And with individuals looking to cut unnecessary expenses, there are growing concerns that demand for Royal Mail’s parcel delivery services will continue to tumble.
Top that all off with a surge in customer complaints, along with new disputes with the unions, and it gives a recipe for stock price decline.
It’s not all bad news
As discouraging as the situation seems, there are some valid reasons to be optimistic about Royal Mail’s share price. Firstly, the pandemic created an exceptional operating environment that was bound to end eventually. But while e-commerce spending has slowed, it remains firmly ahead of pre-pandemic levels.
So it’s hardly surprising that domestic parcel revenue is up by nearly 44% against 2019 levels. It fell versus 2020, but it’s not bad for a 500-year-old enterprise!
Meanwhile, international operations seem to be faring well. Unlike domestic performance, parcel revenue continued to grow, albeit by 4.5%. And excluding a one-time restructuring charge, guidance from management was reiterated. In my experience, that’s a clear sign of confidence for the rest of 2022.
Time to buy?
Today, the Royal Mail share price trades at around four times earnings. Personally, that looks exceptionally cheap. And while investor concerns about parcel volumes are, in my opinion, justified, they seem to ultimately be a short-term problem.
Having said that, I’m not tempted to add any shares to my portfolio today. Why? Because I think there are far better alternative opportunities to be found in the e-commerce sector.
