We currently have a $44 Trefis price estimate for Shutterfly, which stands nearly 60% above its market price. Shutterfly provides online services that allow customers to upload, share, print and store pictures with easy to use web-design services. The company also provides printing services and other print-on-demand services for commercial and retail clients. It derives revenue from three primary sources: personalized products and services, printing digital photos and commercial printing services.
Shutterfly (NASDAQ:SFLY) competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and even Apple (NASDAQ:AAPL) that ventured into this business lately, with its new Cards app on iOS. It recently acquired the photo sharing business of Kodak, which was one of its biggest competitors.
A great growth story
Shutterfly has grown significantly in the last couple of years, both organically and through acquisitions like Tiny Prints and now Kodak Gallery. We expect the Kodak Gallery acquisition to add great value to Shutterfly’s business. It had 75 million registered users and if Shutterfly is able to convert even a fraction of them into paying customers, which we think is highly likely, its $24 million investment in Kodak Gallery would be worth it. Shutterfly’s total number of customers increased was around 5.9 million in 2011, and we expected it to grow to more than 6.8 million organically by 2012. However, this new Kodak Gallery acquisition will significantly boost its user base, and accelerate its international expansion plans.
You can check out the impact of any increase in its value using this chart:
We expect Shutterfly to consistently increase its revenues going forward, by expanding its user base and also growing the average order value by up-selling customers on its other products and services. It also launched a series of new offerings recently, like Videograms, Treat and additional features and card designs, which could help it increase its average revenue. There might be some negative impact of the Kodak Gallery integration on its average revenue, but we expect it to be accretive to its overall revenue.
You can use the first chart in conjunction with this one to check the impact of both an increase in its user base as well as a decline in its average revenue.
Operating Expenses may be a spoilsport
Shutterfly’s sales and marketing expenses increased by more than 90% in 2011, which has bumped up SG&A expenses as a % of gross profit to 68% – an all-time high. This was primarily due to increasing competition in the space and aggressive marketing by its competitors like Snapfish. Going forward, we expect SG&A expenses to decline as a % of gross profit.
We don’t expect Shutterfly to have any problems with revenue growth, but its profitability and ultimately, its intrinsic value depends on whether or not it can simultaneously clamp down on its operating expenses. We have a modest forecast which predicts that it will manage to reduce its SG&A expenses by a marginal amount every year. Any increase or decrease in its operating expenses will significantly impact its value.