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What’s going on with the Royal Mail share price?

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A Royal Mail GLS delivery man
Image source: GLS

The Royal Mail (LSE:RMG) share price has almost doubled in the last 12 months. But recently, it’s started to move a bit flat. It seems investors have been patiently waiting for the next set of results to see whether the business remains on track. Last week these results were released. And the investor response was once again fairly lacklustre. Let’s take a closer look at what the firm has been up to.

The Royal Mail share price versus earnings

For a lot of businesses, the pandemic decimated operations and revenue streams. But in the case of Royal Mail, the management team was able to take advantage of the situation. With lockdown restrictions forcing individuals to stay at home, online shopping was the only viable option for retail therapy. That meant a lot more parcels needed delivering and this company was more than happy to oblige.

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The surge in demand for parcels delivery appears to be one of the primary catalysts behind Royal Mail’s rapid share price growth last year. So, I can see why some investors may be disappointed to see total parcels revenue growing by a mediocre 0.1% over the previous five months.

However, I think it’s worth remembering that 2020 was an exceptional year. And when considering that parcels revenue is up by 33% since 2019, these numbers start to look more attractive. At least, that’s what I think.

When including the performance of its GLS division, total revenue for the interim period rose by a respectable 8.2% compared to a year ago. And in turn, management expects operating profits for the first half of its 2022 fiscal year to come in between £395m and £400m. That is substantially higher than pre-pandemic income levels.

Needless to say, this is good news. So why is the Royal Mail share price still trending downward?

Risk of slowing growth

Looking at the performance of the two most recent months, July and August, there are some troubling signs. The volume of parcels deliveries actually fell by 9%. Management is placing the blame on seasonality. However, there remains a lot of short-term uncertainty about delivery demand now that the pandemic is slowly coming to an end.

Suppose this slowdown in growth were to continue? In that case, the Royal Mail share price gains made earlier this year could soon be reversed. After all, last year’s upward momentum was being driven by shareholder expectations of future growth.

The Royal Mail share price has its risks

The bottom line

As a long-term investor, these short-term issues aren’t overly concerning to me. But they’re definitely worth keeping an eye on.

Current trends continue to show e-commerce slowly becoming a more prominent method of buying things. And as more people rely on online shopping, the need for parcel delivery services like Royal Mail isn’t likely to disappear. With that in mind, I believe the Royal Mail share price can continue to climb higher over the long term, despite the recent signs of a slowdown.

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Zaven Boyrazian 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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