UPS An E-Commerce Stock Play?

E-commerce infrastructure companies are the stars of Wall Street right now, with stocks that most people have never heard of rising to hard-to-believe heights.

Companies such as Commerce One (Nasdaq: CMRC) and Ariba (Nasdaq: ARBAI), which develop solutions that power e-commerce business, may well have the brightest of futures, but are still in the red and make for largely speculative investments.

There is, however, a profitable company with strong earnings and tremendous growth that provides a service that every e-commerce retailer needs: UPS (NYSE: UPS).

UPS Always Gets Paid

Virtually every e-commerce retailer uses UPS as its first, if not only, shipping option. While e-commerce companies are losing millions to attract users and build their brand, UPS is making money every time most of them make a sale. In fact, a random visit to seven different online retailers, including Barnesandnoble.com, Buy.com, Egghead.com and Pets.com, showed that UPS’ service is used by all of them.

The holiday season should mean a tremendous fourth quarter for UPS, which makes money on shipping even when customers are not charged for it.

When companies such as Egghead.com offer free shipping, UPS still gets paid, of course. Also, when companies like Pets.com charge a flat fee for shipping and a customer orders 100 pounds of dog food, the significant shipping overages for such a heavy item are essentially subsidized by the retailer. This situation is simply part of the cost of customer acquisition in the hyper-competitive world of selling online.

Impressive Numbers

Consider the numbers: UPS had revenue of nearly $25 billion (US$) last year, and delivered about 55 percent of the items sold at online retailers during last year’s holiday season. This year is expected to be even bigger. UPS has already earned $222 million on $19.6 billion in revenue in the first three quarters of the year.

On November 11th, UPS went public at $50 a share, raising nearly $5.5 billion in the biggest initial public offering in history. The stock closed up 17-3/8 to 67-3/8 on its first day of trading. The stock is near that level right now after climbing 3-1/16 to 66-3/16 on Tuesday and gaining 1-1/4 in early trading today.

As a long-term play, UPS looks like a keeper. The stock is not cheap — the company has a market value of nearly $80 billion — and UPS stock is not going to see the same kind of dramatic climbs that pure-play Internet infrastructure plays have been experiencing.

UPS, however, does offer investors a rare opportunity: The ability to invest in the Internet and sleep soundly.