At my 4-year old's preschool, each kid has a job that rotates on a daily basis. One will tell the class the weather (by looking out the window) before they go outside, another will help set up for lunch. The most coveted job is that of line leader.In business, it's good to be the line leader, too. Online printer VistaPrint ( VPRT) is clearly the leader in the market for servicing the printing needs of the small office and home office -- a $19 billion business. But like in my son's class, there's always someone gunning for your job. The Consensus Story: Wall Street is enamored of VistaPrint's large growth numbers, albeit from a small base. In fiscal 2005 ended June 30, 2005, VistaPrint earned 42 cents per share on $90.9 million in revenue. The First Call consensus is for EPS growth of 19% in fiscal 2006 and another 58% in fiscal 2007 amid even more explosive revenue growth. The mean long-term EPS growth estimate is 47%. The Street believes that VistaPrint's proprietary aggregation process is a disruptive technology that gives it a decided advantage over its competitors. The company is a clear leader in the online space, with an easy-to-use interface and aggressive marketing. Business is booming: In the March quarter, VistaPrint processed an average of about 15,000 orders per day, up from 12,000. That's a lot of business cards. The Real Story: VistaPrint's technology isn't as proprietary as it appears. The list of competitors is not especially large now, but the barriers to entry are not as formidable as the company would have investors believe. As more competitors emerge and insiders continue to dump their shares post lockup expiration, VistaPrint's valuation should contract.
Business ModelWall Street likes how VistaPrint does business. The company has a large customer database and proprietary technology that enables it to aggregate many orders and print them all at once. Naturally, this has a positive impact on margins and allows VistaPrint to charge lower prices.
Margin Pressure?In the third quarter, VistaPrint's gross margin was a higher-than-anticipated 70.6% due to a shift in product mix and higher capacity utilization. Going forward, management expects gross margin to be in the 65%-67% range. The company expects net margin to be in the 13%-14% range, while 2007's target is 15%. VistaPrint is able to achieve higher net margin than some other companies due to its incorporation in the tax haven of Bermuda. In the nine months ended March 31, VistaPrint paid just $1.1 million in taxes on $14.8 million in income -- or roughly a 7.5% tax rate. However, Howard Rosencrans, chief research analyst with Capital Growth Financial, believes the margins are unsustainable. "VistaPrint is serving the price-sensitive, low-end consumer market with production from widely available commercial offset presses," said Rosencrans, who made a