Will Royal Mail shares double in 2022?

Royal Mail shares have been on fire, but can this momentum continue in 2022 and beyond? Zaven Boyrazian investigates.

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Royal Mail (LSE:RMG) shares have had a pretty impressive run over the last 12 months. In fact, the stock is up nearly 50%. And since January 2019, it’s basically doubled!

That’s some pretty impressive growth for a company founded in the 16th century, especially given the world fell into a pandemic during the period. So what’s behind this sudden growth spike? And can the stock double again in 2022? Let’s explore.

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The momentum behind Royal Mail shares

The upward trajectory of Royal Mail shares started in 2020. While the group undoubtedly suffered significant disruption from the pandemic, it also enjoyed notable tailwinds. More specifically, the accelerated adoption of e-commerce.

With the demand skyrocketing for online shopping delivery solutions, the last three months of 2020 were “unprecedented”, according to management. And looking at the figures, I have to agree. During the quarter, the company delivered 496m parcels – the highest amount in the business’s 500-year history.

Consequently, the group’s 2021 fiscal year, spanning from March to March, saw a 16.6% jump in revenue – the highest it’s been in over five years. While the double-digit growth is impressive, it doesn’t hold a candle to what happened to the bottom line.

Combining this feat with some clever corporate restructuring, operating profits went from £141m in March 2020 to £728m the following year. That’s a 416% jump within 12 months!

Management is using the proceeds to improve the balance sheet by wiping out a good chunk of debt. At the same time, it’s expanding investments into improving delivery infrastructure, as well as international operations.

With that in mind, seeing Royal Mail shares jump 100% is hardly surprising. And if the company’s latest ventures are successful in creating long-term value, I think the stock can double once again – maybe even in 2022.

Taking a step back

I can’t deny that this business’s recent performance and renewed growth capacity is exciting. But, like any company, Royal Mail has its fair share of challenges to overcome. Most notably, competition.

The surging demand for parcel delivery solutions hasn’t gone unnoticed by other logistics firms. Plenty of competing delivery companies are ramping up operations and spending to capitalise on the opportunity. What’s more, many of these businesses aren’t riddled with interest-bearing debt chipping away at free cash flow.

Suppose management isn’t able to keep up with its more agile competitors? In that case, Royal Mail shares could start heading in the wrong direction as the company loses market share.

Time to buy?

All things considered, I think 2022 could be yet another ground-breaking year for Royal Mail shares. Looking at the most recent results, revenue is still climbing along with profits and margins.

Having said that, I’m personally not tempted to add this business to my portfolio. Why? Because I think there are even more lucrative opportunities to be found elsewhere.

Opportunities, such as...

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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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