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Can Royal Mail shares climb higher?

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Royal Mail (LSE: RMG) shares hit one of their highest levels since the company’s IPO last month. The stock reached 590p, below its all-time high of 630p printed in May 2018. 

Shares in the company have jumped following the surge in parcel deliveries over the past 14 months. Royal Mail has risen to the challenge and introduced some significant changes to its operations to facilitate higher delivery volumes. 

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The company has also been investing in improving its operations. Management has outlined plans to spend hundreds of millions of pounds modernising operations and automating processes over the next few years. 

However, while I’m incredibly excited about the company’s planned changes, I’ve recently turned cautious on the stock. 

Overheating 

I think Royal Mail shares have been a tremendous investment, but I believe the stock has risen too far, too fast. 

The pandemic isn’t yet over, but there are some signs that the online retail boom, which took place last year, has started to moderate.

With brick-and-mortar stores back open, consumers have more options. Consumers are also allowed to travel around the country again, which means they can deliver packages personally, rather than having to rely on Royal Mail’s service.

The company itself has also warned that growth could moderate over the next 12-24 months. In the outlook section of its 2020-21 annual results, Royal Mail noted: “As the outlook for 2021-22 contains a number of uncertainties that could significantly influence volumes and costs it is difficult to provide specific guidance for 2021-22.

I think 2021 is likely to be a year of change for the group. By investing more, Royal Mail will be able to build a business for the future. This will come at a cost, but it should yield results in the long run.

It’s also making more changes to the way it operates. Earlier this week, rumours emerged that the group is planning to introduce timed delivery slots for customers. Many of the company’s competitors already offer this service. Royal Mail’s decision to enter this part of the market shows it’s serious about taking on these firms. 

Risks of owning Royal Mail shares

Unfortunately, the company will need to do more than offer customers delivery slots to maintain its competitive advantage. It’ll need to keep investing to meet customer demands. With competitors snapping at Royal Mail’s heels, it needs to stay on top, or it could be left behind. 

Considering all of the above, I think the stock will struggle to continue to move higher, so I wouldn’t buy Royal Mail shares today.

As of yet, it’s unclear how the delivery and e-commerce markets will emerge from the pandemic. What’s more, I think the company will have its work cut out over the next 12-24 months as it focuses on building on the lessons of the past year. 

Therefore, I’m happy to wait on the sidelines until the company’s transition is complete. 

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Rupert Hargreaves 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.

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