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 Model

Wall 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.

However, there is a dispute as to who owns some of the technology. Up until September 2005, Mod-Pac ( MPAC) handled the back-end printing for VistaPrint. Since then, VistaPrint has brought the printing in-house with proprietary and patented technology. However, Mod-Pac, which is run by VistaPrint CEO Robert Keane's father and brother, claims an inventorship interest in the print-aggregation technology. A representative from VistaPrint does not believe that Mod-Pac is currently using the technology. Calls to Mod-Pac were not returned.

What is known, however, is that Mod-Pac has started its own printing business, PrintLizard.com. While the site probably will not make for stiff competition anytime soon, it illustrates that companies with back-end technology will join the fray, attracted by the plump gross margins that are attainable in this business. It will be difficult for VistaPrint to maintain its market share as more competitors emerge.

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 timely bullish call on Elan ( ELN) in early March.

Rosencrans believes "others can and will duplicate VistaPrint's model." Capital Growth Financial does not have an investment banking relationship with VistaPrint and Rosencrans, who has a sell rating on the stock, does not have a position in the stock.

Business Practices

Another issue that may open the door for competitors is VistaPrint's reputation. It appears customers either love or hate the company. VistaPrint boasts that 63% of revenue came from repeat business in the third quarter.

However, Internet message boards are full of complaints from unhappy consumers who have received charges for Passporttofun and BusinessMax on their credit cards after purchasing products from VistaPrint. A VistaPrint spokesperson said that those are reward programs that users must opt into and that they are sent several emails confirming their participation. Nevertheless, the charges seem to have caught quite a few people off guard.

VistaPrint has been able to create its large customer database through aggressive marketing techniques. However, the company's email campaigns have landed it on one or more blacklisting entities, according to the company's most recent 10-Q filing. VistaPrint believes its email solicitations comply with all laws and the company is a member of the Messaging Anti-Abuse Working Group, which promotes best practices for email marketing.

The Better Business Bureau has an unsatisfactory rating on VistaPrint: It received 129 complaints in the past 12 months. Of these, 76 were resolved by the company, 52 were administratively resolved (which means the case is closed but doesn't guarantee that the complaining party was satisfied) and one remains unresolved. That compares with iPrint, which had five resolved complaints, or Printingforless.com, which had zero complaints in the same period. Both companies have a satisfactory record. But keep in mind, both businesses have a smaller customer base than VistaPrint.

Valuation

The stock is currently trading around $31. But Rosencrans believes the stock is worth $20 based on an enterprise value-to-sales ratio of 4.4. While VistaPrint is the only online consumer-focused printer that is publicly traded, Rosencrans notes other printers such as R.R. Donnelley & Sons ( RRD), Bowne & Co. ( BNE) and Quebecor ( IQW) trade at an EV/sales multiple of 1 or below.

One last issue that could put pressure on the stock -- on March 29, 29.5 million shares were freed from lockup. There are currently 40.1 million shares outstanding, so liquidation of those shares could weigh heavily on the stock price. Executives, including Keane, directors and venture capital partners have already dumped some shares. The company estimates that 16 million shares have not yet been sold.

VistaPrint is an example of a strong business that is probably at the top of its game right now. As more competitors invade the space, it's likely the stock will have nowhere to go but down.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.

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