Since reaching a multi-year high of more than 600p at the beginning of June, Royal Mail (LSE: RMG) shares have been sliding. The stock has lost around a fifth of its value since this high watermark.
While it is impossible to predict the future, following this performance, I am starting to wonder if this trend will persist. There is a chance it could do.
Royal Mail shares fall out of favour
Last year, Royal Mail shares led the market higher as the company benefited from a significant increase in parcel delivery volumes during the pandemic.
Revenues have not started to contract yet, but the company’s growth has slowed down. At the same time, management has outlined plans to spend hundreds of millions of pounds on infrastructure. The organisation cannot avoid this spending.
The group needs to invest in its operations, or more nimble competitors could leave it behind. It needs to invest in automated processes and efficiencies, which the previous management fail to do. Now the company is paying the price.
This elevated spending will undoubtedly weigh on Royal Mail shares. After all, spending will reduce profitability. However, after a bumper time last year, there has never been a better time for the group to invest in its operations.
This presents a bit of a dilemma. Higher levels of capital spending will hurt the company’s profits. Nevertheless, this spending should yield results in the long run.
At the same time, the company’s delivery volumes are still expanding. It seems likely they will continue to grow as the e-commerce sector expands. This will only intensify the need for the business to spend more on automating its processes.
Considering all of the above, I think Royal Mail shares will continue to slide as investors re-evaluate the group’s prospects.
Still, here at The Motley Fool, we are long-term investors. We are not particularly bothered about whether or not a company’s profits will fall from one quarter to the next. We are interested in long-term growth.
As such, I am willing to look past the company’s current spending plans and focus on its potential over the next five to 10 years. On that basis, I would buy Royal Mail shares. I think parcel volumes will increase in the long run as the e-commerce sector expands.
Royal Mail should be able to capture a significant slice of this market, and its new automated systems will allow it to process these parcels more efficiently.
That being said, the delivery market is incredibly competitive. Competitors are constantly nipping at its heels, and there is no guarantee Royal Mail will be able to outmanoeuvre them forever. Moreover, labour costs are rising. The company may struggle to pass on these higher costs to consumers.
All in all, I think the outlook for Royal Mail shares is bright, but the firm will face challenges as it advances.
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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.