This Stock Should Continue to Fly

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Would you like to invest in a company that has seen stock appreciation of more than 90% year to date? In the first quarter, this company’s customer count increased 20% year over year, and its average order value bounced 7% year over year. This company continues to beat quarterly expectations, and it recently increased full-year revenue guidance.

The big picture

Shutterfly (NASDAQ: SFLY) came out of nowhere in 1999. Since that time, the company’s popularity has exploded. It’s now the go-to location for digitalized personal photo services in the United States. In addition to photo printing,

Shutterfly’s revenue has consistently increased annually. Earnings had consistently increased until a setback in 2011, but earnings bounced back in 2012. Below are the diluted EPS numbers:

  • 2008: 0.18
  • 2009: 0.22
  • 2010: 0.59
  • 2011: 0.40
  • 2012: 0.61

As you can see, Shutterfly is always in the black, but earnings growth has been tepid. On the other hand, many investors prefer to see slow earnings growth, because it’s often more sustainable. On a quarterly basis, three of the last four quarters have been losses, but this was partly due to acquisition costs.

Shutterfly has been very aggressive with acquisitions, which should help top-line growth. These acquisitions look to be a wise strategy because one important trend, which we’ll get to soon. Shutterfly’s acquisitions have included MyPublisher, Penguin Digital, ThisLife, and Photoccino.

An important trend

According to Alexa.com, Shutterfly.com ranks No. 1,558 in the world and No. 389 in the United States for online traffic. The site always receives the most visitors late in the year -- around the holidays. Traffic at the current time of year is slightly better than last year, which is a positive sign. In many cases where a company relies heavily on online traffic, we will look at page views and time-on-site trends, but this situation is different.

According to Alexa.com, the age demographic of 35-44 is by far the most overrepresented at Shuterfly.com. That’s because many people in this age demographic have children. When people have children in their household, they take more pictures -- a lot more pictures. That being the case, more people with children is a positive for Shutterfly. However, if you’re looking at long-term trends, the outlook is weak.

When reading the information below, keep in mind that people have more children when they’re confident about the economy. They have more confidence in their income potential and their ability to provide for those children. When the economic outlook is fragile, people tend to have fewer children as they don’t feel as confident in their ability as providers.

According to the United States Census Bureau, United States population growth stood at 1.7% in 1960 and 1961. That would be the peak for population growth between then and the present. In the second half of the 1970s, population growth held steady at 1.10%. This weaker number related to a struggling economy. Population growth increased in the 1990s, but in 2010, population growth reached its lowest level on record at 0.8%. That all-time low was then broken in 2011 at 0.7%. Population growth bounced back to 0.9% in 2012, but that’s still considerably lower than the average.

As people have fewer children due to a lack of confidence in the direction of the economy, growth potential for Shutterfly will slow.

Shutterfly vs. Other Hot Mid-caps

Shutterfly is currently trading at 106 times earnings. Therefore, there is very little margin for error. The good news for momentum traders is that Shutterfly has a knack for beating expectations, which drives the stock higher. Full-year guidance has also been upped to $766-$771 million from $739.7-$746 million. Near-term trends are still strong.

Zynga (NASDAQ: ZNGA) is another mid-cap stock drawing a lot of attention. Check out my article written on June 30, 2013: Zynga’s Flaws, Threats, and Potential. The following is the final line in that article: “Perhaps a new leader with direction and an innovative spirit would serve the company well.” The next day, Don Mattrick -- former leader of Microsoft’s entertainment division -- took over. Mattrick has a superb track record, and this news sent Zynga’s stock flying.

Zynga has dealt with two years of losses, and three of the last four quarters have been in the red. Zynga has also demonstrated poor efficiency, sporting a profit margin of -9.80%. Investors like to look at the direction of a company, and with Mattrick at the helm, the company’s direction should improve. Even if he can’t get the company to profitability and quality efficiency levels right away, he will likely lead the company toward substantial improvements. With new leadership and real-money gaming on the horizon, Zynga’s outlook has suddenly brightened.

Groupon (NASDAQ: GRPN) is another company that has delivered fruitful returns for investors since new management took over. Groupon has suffered from four consecutive years of losses, but those losses have narrowed over the past two years. Other positives include continuous revenue improvement, improved performance in mobile, and stronger customer retention. However, Groupon is trading at 31 times forward earnings, but the barrier to entry is lower than a tree stump. In other words, this business model is easy to replicate. If Groupon succeeds, there is little doubt that other entrepreneurs will desire a piece of the pie, which will then lead to fierce competition.

Luckily for Shutterfly, management is already strong and the brand is well established, which would make it difficult for a competitor to come in and steal market share. However, Shutterfly does have to worry about the increased photo sharing through social media. 

Conclusion

Shutterfly is a well-managed company making all the correct moves. Its aggressive acquisitions will lead to increased top-line growth, and the stock should continue to perform well in the near future. Unfortunately, population growth trends will likely lead to slowing growth over the long haul. 


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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