The Royal Mail (LSE:RMG) share price has taken a bit of a tumble over the last week or so. The catalyst behind the recent downward trajectory seems to be its latest trading update. Yet despite this, the stock is still up by over 215% over the last 12 months. Was the update as bad as investors think? And is the fall in the Royal Mail share price a buying opportunity for my portfolio? Let’s take a look.
A seemingly positive trading update
Last month, the management team provided some insight on the performance of the business during the previous three months. And despite the behaviour of the Royal Mail share price, the trading update actually looks quite positive. At least, I think so.
First-quarter revenue increased to £3.16bn. That’s a 12.2% rise compared to a year ago and 20.2% versus 2019. It was predominantly driven by the firm’s relatively new focus on parcels delivery. Interestingly letters have also somewhat regained popularity this quarter. Gross income from letter delivery increased 25.7% to £934m versus £743m in 2020. However, it’s worth noting that this is still around 7% lower than pre-pandemic levels.
Given that the firm achieved double-digit revenue growth across the board, why is the share price falling?
The wobbly Royal Mail share price
Despite the rising income, there is a growing level of uncertainty surrounding parcel delivery volumes. Thanks to bricks & mortar retail stores reopening as lockdown restrictions end, our dependence on online shopping has begun to falter. Should this trend continue, the firm’s parcel delivery growth streak might be coming to an end.
It seems the business has already begun to feel the pressure. Its parcel delivery volumes in the last quarter fell by 13% compared to a year ago. So, I’m not surprised to see the Royal Mail share price take a hit.
Seeing the volume of parcels decline is undoubtedly not a good sign. However, I think it’s worth considering that the comparison period to 2020 is somewhat skewed. After all, the UK was in a complete lockdown last year. And e-commerce was the only option available for buying non-essential items. Comparing the figures to 2019 reveals a promising increase of 19% in parcel volumes. To me, that indicates a potential trend of online shopping becoming a more prominent retail option for consumers.
The bottom line
The pandemic is far from over. And it’s too soon to tell whether the rise in parcel deliveries over the past two years will stick around once Covid-19 is no longer influencing the economy. However, I believe the pandemic has only accelerated the adoption of e-commerce. While there may be some short-term decline in volumes, I expect this figure, along with the Royal Mail share price, to continue climbing over the long term. Therefore, despite the risks, I see the recent drop as a buying opportunity for my portfolio.
