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Investment Overview for Shutterfly (NASDAQ:SFLY)
Below are key drivers of Shutterfly's divisions that present opportunities for upside or downside to the current Trefis price estimate for Shutterfly:
Photos, Cards, Albums and Stationery
- Average Price per Order: The Average Price per Order (APO) increased from $26 in 2007 to $37.6 in 2012. The fourth quarter order value in 2012 was about $50 and flat year over year. However, aggressive innovation by Shutterfly and its ability to encourage repeat customers could result in an increase in APO to $45 by the end of our forecast period and result in an upside of about 6% to our price estimate. On the other hand, a slowdown in innovation could result in an increase in the total number of orders without a sufficient increase in revenue. This would be attributed to a greater contribution of low price products in the overall revenue. In such a scenario APO could decline to only $35 by the end of our forecast period resulting in a 10% decline in the current estimated Trefis price.
- Total Number of Customers:
The total number of customers increased rapidly from 2.4 million in 2007 to 5.9 million in 2011. E-commerce has been evolving at a rapid pace and therein lies Shuttefly's opportunity to tap the growing market. A strong increase in customer acquisition due to an aggressive marketing campaign coupled with increasing customer preferences to purchase online could result in the total number of customers rising to 15 million by the end of our forecast and result in a 10% increase in the Trefis estimated price. On the other hand in the event of a poor economic environment the number of customers acquired could increase to only 10 million resulting in a 10% decrease in the estimated Trefis price.
- Orders per Customer:
Orders per Customer have historically declined for Shutterfly from 3.0 in 2007 to 2.2 in 2011. The introduction of Treats.com greeting card service in the product mix saw the Orders per Customer increase to 2.3 in 2012. Trefis estimates the Orders per Customer (OPC) to increase gradually during the forecast period. Shutterfly has adopted a strategy of projecting its premium image to its loyal customer base. This would support the gradually increasing trend and result in repeat buying by its customers resulting in an increase in the OPC to 3.0 by the end of our forecast period and subsequently result in a 13% increase in its stock price. However, if the order per customer stays flat, it would result in a decline in the stock price by about 5%.
Shutterfly is an internet based social expression and personal publishing service that enables consumers to share, print and preserve pictures using a combination of technology, manufacturing and web design. Shutterfly's primary focus is on helping consumers manage their memories through the medium of photography.
Shutterfly derives it revenues from three major streams: personalized products and services, printing digital photos and commercial printing services. Most of Shutterfly's products are either shared over the internet or given as gifts. Shutterfly places targeted advertisements on websites and in publications to push the sales of its products and services.
Shutterfly's primary source of value is its range of personalized products which include photo books, stationary and silver halide photo prints with designed content used for greeting card occasions ranging from holidays to birthday cards and thank you notes. Shutterfly's continued stress on innovation, increasing customer options and product differentiation also results in personalized products being a key factor in driving the stock price value.
Seasonal nature of business
Shutterfly generated more than 50% of the 2012 net revenues in the fourth quarter of 2011. The net income that was generated during the fourth quarter of 2012 was necessary for them to achieve profitability on an annual basis. Shutterfly incurs significant additional expenses in the period leading up to the fourth quarter holiday season which includes expenses related to the hiring and training of temporary workers to meet seasonal needs, additional inventory and equipment purchases as well as increased advertising. Hence, a weakness in the ability to accurately forecast consumer demand during the fourth quarter could result in denting brand image and financial position.
Weak economic conditions resulting in low consumer spending and decreased consumption could harm Shutterfly's gross margins as product purchases are often discretionary. A prolonged and slow economic recovery or a renewed recession may also add to additional restructuring actions and associated expenses. Due to reduced consumer spending and increased competitive pressures in such an environment, Shutterfly may not be able to pass these increased costs on to their customers resulting in lower prices for products and services and thus reduced sales.
Proliferation of social media and internet photo hosting sites
Shutterfly operates in a highly fragmented business. It faces serious threats from social networking sites like Facebook, Twitter and Myspace which allow users to share photos on their websites. Specific photo hosting and sharing websites like Picasa and Flickr also pose threats to Shutterfly. In the personalized products space, it has to compete with Hallmark and American Greetings.
Even Apple recently entered the personalized photo and greeting card printing space with its new app - Cards. While it's charging less than Shutterfly, it offers fewer designs and less customization.
Product Portfolio Expansion
Shutterfly acquired Tiny Prints in first quarter of 2011 to increase its reach on social networking sites especially Facebook. It plans to leverage the online user base of Tiny Prints and Wedding Paper Divas (a Tiny Prints subsidiary)to establish its brand in international markets. An international expansion strategy is expected to be drafted from 2012 after the successful integration of Tiny Prints in 2011. This move will help to expand Shutterfly's current user base. It also acquired Kodak Gallery in 2012, which helped it boost its user base significantly.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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