Shutterfly Promises Robust Returns

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

Shutterfly (NASDAQ: SFLY) recently reported its FY 2012 financial performance. The company posted robust numbers that make it a highly profitable prospect for potential investors. Total revenue grew by nearly 35% to $641 million, while Unique Users grew by 30% to 7.1 million. The exceptional growth by the company in the last few years can be attributed to active acquisitions and strong performance in the consumer segment. Shutterfly last year acquired Photoccino and Penguin Digital, which enabled the American based corporation to constantly develop on its existing operations and increase the online transactions. Shutterfly primarily competes with American Greetings (UNKNOWN: AM.DL), Snapfish, Cafe Press in the online printing space and Apple in mobile apps.

Shutterfly iPhone Application

Last year, with the acquisition of Penguin Digital, Shutterfly introduced a new mobile phone application for photo prints and prints on canvas and merchandise. The mobile application is an incremental development on the app introduced by Shutterfly a few years ago. Going forward the mobile platform is expected to be the key driver for Shutterfly’s revenues. In a recent interview with Karl Wiley, a GM at Shutterfly, describes the importance of mobile photography and how the mobile app segment will drive future revenues. He further pointed out that by the end of 2013, roughly 40% photos taken in the US are going to be through mobile phones. Nonetheless, it can be argued that Shutterfly entered the customized mobile phone apps a little later than expected, as start-ups like Penguin Digital were already out with such apps. Nevertheless, active M&A activity to acquire technology and competences in order to provide a variety of services to consumers keeps Shutterfly ahead of its competitors.

Organic Growth Through M&A Activity

Shutterfly has grown its consumer base consistently over the years and recorded a jaw dropping 30% growth from 2011 in its unique users. In addition, investing in innovative marketing and promotional activities has enabled the company to record consistent organic growth too. Last year, Shutterfly acquired certain assets of Eastman Kodak in online photo printing, adding to the two strategic acquisitions of Tiny Prints and Photoworks in 2011. The three strategic acquisitions proved rational investments, as the consumer base grew exponentially last year. Furthermore, the acquisitions also presented an opportunity to diversify its product mix and offer both high and low end products.

Growth in the Commercial Printing Segment

Shutterfly reported strong growth in the commercial printing segment, as the revenues doubled from the previous year to $27 million. The performance was underpinned by the growth in the consumer base and increase in the number of orders from the existing customers. The revenue contribution from the commercial printing SBU to the total revenue of Shutterfly grew to 4%, up from 3% in 2011.

Strong Competitive Advantage

The main competitive advantage that Shutterfly holds over its prime competition is that the printing facilities are located in-house. Contrary to that, many of its competitors outsource their printing requirements, which leads to higher operational cost and delivery times.

In addition, American Greetings' strategy to shut down the free photo storage website may not settle well with its consumers. The shut down may lead to the alienation of its consumers and an eventual shift to Shutterfly. Furthermore, Snapfish, which was acquired by HP (NYSE: HPQ)has been struggling to maintain its ground again. Moving forward, HP is expected to sell the unprofitable photo print segment. Conversely, Shutterfly seems to have the most diverse and well positioned offerings in the online printing space, and the company is poised to gain from potential international expansion and the mobile app SBU.

Competitor Highlights

HP’s services include technology service outsourcing, business process outsourcing, printer and ink cartages. In addition, they also provide servers and storage. In 2011, HP acquired HIFLEX (software solution for print industries). American Greetings is one the largest greeting card company. The company primarily deals in paper and electronic greeting cards. It also has an online printing segment that currently competes with the likes of Shutterfly and Snapfish. Apple primarily deals in Desktops, Notebooks, Software Services, and Peripherals. They compete with Shutterfly in the mobile apps business.

Industry Drivers

The printing industry may be declining as a whole; nevertheless, customized printed products like cards, calendars, and print on canvas are extremely lucrative and present a huge opportunity for growth.  Photo merchandise like customized calendars, print on canvas, greeting cards are showing rapid growth globally as the quality of product customization and logistics improve. The acceptance of e-commerce as a whole and growing consumer awareness via smart marketing and various TV campaigns is driving the online photo printing industry.

Robust Financials

Shutterfly is currently trading at its highest levels. The projections by Trefis suggest that the revenues are set for a CAGR of 10.63% till 2019. The current trading price is $42 which is nearly 99% of its 52 week high. In 2012, Shutterfly broke the consensus EPS by posting $1.50. The PE ratio in 2012 was 43.20, however the 12 month forward PE is 89.15 which may suggest that the stock may be overvalued and is demanding a higher price relative to earnings. Nonetheless, it must be noted that companies with faster growth rates and promising industry outlook will ask for a premium on their stocks relative to companies that grow at a slower rate and involve a higher level of risk. The PE ratio can suggest a lower intrinsic value for Shutterfly’s stock, however our estimate is that a higher PE of Shutterfly is due to faster and more promising growth prospects relative to competitors.


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