RMG: Royal Mail share price is hanging on a thread

  • June 8, 2022

The Royal Mail (LON: RMG) share price is nearing a key support level as demand for the stock wanes. The shares are trading at 300p, which is slightly above the year-to-date low of 292p. They have crashed by more than 47% from the highest point in 2021.

Why has RMG crashed?

Royal Mail and companies like Zoom Video, Shopify, and DocuSign have little in common. While Royal Mail is a traditional mail and parcel deliverer, the others are high-tech growth companies.

But in terms of market cycles, all these companies have some similarities, which explains why their shares have tanked.

The main reason is that these firms are now categorized as lockdown stocks. This means that they did well as countries locked down. Royal Mail benefited as lockdowns pushed more people to shop online. 

Indeed, its annual revenue surged from $13 billion in 2019 to over $17 billion in 2020. As its business boomed, the company made its first acquisition in years when it bought Rosenau in 2021. It also decided to reward shareholders with a £400 million special dividend.

Now, the tide has changed and Royal Mail is struggling. Many people in the UK are now shopping in stores while the volume of mail is stubbornly low. At the same time, the cost of running its operations has risen as wages and oil costs have soared. A dispute with union members has not helped.

In its most recent earnings, Royal Mail warned that its business prospects were dimming. The firm said that its revenue rose to 12.71 billion pounds in the year ending in March. Its net income fell to 612 million pounds from the previous 620 million pounds.

The RMG share price will likely remain under pressure as investors embrace a new normal of slow growth and low profitability.

Royal Mail share price forecast

The RMG share price has been in a strong sell-off in the past few months. This decline accelerated when the shares moved below the important level at 382p, which was the lowest point in October last year. The shares remain below the 25-day and 50-day moving averages. 

Notably, they are along the lower side of the falling channel pattern that is shown in blue. The Relative Strength Index has moved below the neutral point at 50. Therefore, a break below the support at 292p will signal that bears have prevailed and push it to 250p.

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