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UK shares as a whole have seen their value drop over the course of the last year. However, some FTSE 100 and FTSE 250 constituents have managed to buck that trend.
Some have even done so quite spectacularly. The Royal Mail (LSE:RMG) share price is one of those stocks that has massively outperformed the main UK indices.
The pandemic completely revitalised Royal Mail shares. They had been suffering a downward spiral with falling demand for its postal services. The company oversaw a major increase in the volumes of parcels being sent with many confined to their homes for long periods in 2020 and into this year.
How far can the Royal Mail share price go though? Is this a short-term bubble that could burst in a post-Covid world?
Online purchasing power
A major switch to e-commerce was already happening when the pandemic started to make an impact last year. But then it exploded.
Fortunately for Royal Mail, the company was there to deliver a lot of those extra online purchases we were (and still are) making.
The company was quick to respond to the pandemic. It hired thousands of new staff and improved efficiency with new pick-up and payment technologies.
Last week Royal Mail forecast 2020-21 revenue to be “significantly” beyond the top end of the £380m-£580m range guided for in November. That came as it reported its fiscal third-quarter parcels revenues grew 43.3% to £3.8bn.
The courier shifted close to 500 million packages in its third quarter, 30% higher compared to Q3 in 2019.
So in terms of performance and profits, everything looks pretty solid as far as Royal Mail is concerned. I’m not sure whether this performance is sustainable though.
Changing fortunes
The increased demand for parcel delivery services due to Covid-19 restrictions is unlikely to remain there in the long term.
As I’ve mentioned, the business was struggling and its share price was falling before the pandemic. Another reason I’m unsure about the company is its labour relations history.
A long-running dispute between Royal Mail and its employees ended in December when they agreed a 3.7% pay rise as the company refocuses to cash in on the lucrative parcels market. But problems could resurface in the future.
And with analysts predicting the company will return to growth in 2021/22, I see much of the good news as already priced-into the current Royal Mail share price of 470p.
Another reason why I’m sceptical about Royal Mail shares is rising competition for courier services. In my local area recently I’ve noticed a significant increase in Amazon Prime delivery vans as the US e-commerce giant invests in its own delivery service across the UK.
I think that others may follow suit over the next few years, potentially leading to a lower reliance on Royal Mail posties to deliver online orders.
As a result, I currently don’t see enough potential upside in the Royal Mail share price to add it to my portfolio today.
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conorcoyle has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
