The world’s largest e-commerce company, Amazon (NASDAQ:AMZN), kicked off the summer by announcing that it was throwing away plastic. By the end of this year, the company hopes to replace 95% of the plastic pillows in its packaging with paper. The company’s press release states that the move will “avoid nearly 15 billion plastic pillows per year.”
Many people probably processed this announcement simply by thinking about the environmental implications. But as an investor, my thoughts immediately turned to something else: That’s a lot of plastic pillows to replace with paper. And I was wondering if there was a company that could benefit from this decision by Amazon.
In fact, there are. Ranpak Holdings (NYSE:PACK) is a company that few investors have heard of. But it could find itself as a sudden beneficiary of Amazon’s abrupt move.
Ranpak is a surprisingly strong company
Ranpak sells machines for packaging filling, wrapping and cushioning. It also sells consumable paper products for these machines. As of the first quarter of 2024, the company had 141,000 machines placed with various companies. And as these companies use their machines, they eventually come back to Ranpak when they need more paper.
According to some investor presentations, Amazon is already a customer of Ranpak, although it’s unclear how big that is. Craig-Hallum Analyst Greg Palm Says Amazon Is Ranpak’s the biggest direct customer, according to The Fly. But this is not explicitly stated in Ranpak’s annual documents.
That said, 30% of Ranpak’s revenue in 2023 came from ecommerce businesses. It is important to keep this in mind. The company also claims that 11% of its revenue comes from direct customer purchases, while the rest comes from its distributor business model. So this is an idea of how big Amazon could be for Ranpak.
Ranpak won’t necessarily wow you in terms of growth or profit margins. But there is a certain strength in his model. Once companies purchase their machines, they have an incentive to continue using them. And as they consume the paper products, they need to restock from Ranpak. It’s a form of recurring revenue, which is a good thing. The company does not present this financial data, but it indicates that its consumables have a “high margin”.
What could happen after Amazon’s big move?
Ranpak released a special purpose acquisition company (SPAC) – the transaction was completed in 2019. Therefore, it has been trading under its current ticker symbol for almost five years. As the chart below shows, revenue growth and earnings per share (EPS) growth have been better than the stock’s performance.
Ranpak’s revenue and profits could be poised to rise further as Amazon moves to replace 15 billion plastic pillows with paper. Ranpak won’t necessarily be Amazon’s only supplier, but the boost to its business could be significant. Additionally, the increase in profitability could be even more pronounced, since management says consumable paper products generate a higher margin.
Additionally, Craig-Hallum’s Palm theorizes that Amazon’s decision could have repercussions throughout the e-commerce space. Likewise, more companies could abandon plastic in the coming months, like the industry leader. Given that 30% of its revenue comes from e-commerce businesses, this secondary ripple effect could be increasingly important for Ranpak.
I’ve avoided giving hard numbers on the potential upside for Ranpak because investors simply don’t have enough information to be that specific. There are many unanswered questions.
However, here are some encouraging things investors should keep in mind with Ranpak today. First, the stock is reasonably priced. As of this writing, its price-to-sales (P/S) ratio is around 1.5, which is typical of a low-growth company.
Investors don’t have to pay for Ranpak shares – the valuation is reasonable.
The other important thing to keep in mind is that Ranpak is, in my opinion, a low risk investment. As its business has a recurring revenue element, the financial results are consistent. It is not reasonable to worry about a sudden change that could put the business at risk.
In other words, if Amazon’s move to paper doesn’t bring any benefits, Ranpak’s business should continue as it is now. The stock will not necessarily increase. But I wouldn’t expect things to go wrong.
However, if Amazon’s shift to paper does indeed provide an advantage, the positive effect for Ranpak could be significant. Additionally, if other e-commerce companies follow Amazon’s lead, Ranpak’s bottom line could take a big hit.
I don’t think the market is pricing in this potential upside for Ranpak stock today, which is why it’s an interesting opportunity. It won’t make many newspapers. But it could be a low-key way to take advantage of Amazon’s packaging announcement.
Should you invest $1,000 in Ranpak right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool posts and recommends Amazon. The Motley Fool has a disclosure policy.
Amazon is ditching plastic and switching to paper filler products. Here are the hidden small-cap stocks that could soar as a result. was originally published by The Motley Fool
