These Two Scenarios Can Significantly Increase Shutterfly’s Valuation

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Shutterfly

Leading internet-based image publisher, Shutterfly’s share price has been stagnant for a while now. Shutterfly recently inducted two members from Marathon Partners (an activist investor firm holding a 5% stake in the company) onto its board. This can lead to some shareholder-friendly changes at Shutterfly. These reforms, coupled with Shutterfly’s current financial conditions and management statements, indicate that the company might be on the lookout for an acquisition target. Additionally, Shutterfly’s future integrated platform, Shutterfly 3.0, can improve the company’s customer base and adoption rates. Under both these scenarios, Shutterfly’s stock price might experience significant increases. We explore the two scenarios in detail below.

Our $45 price estimate for Shutterfly is slightly below the current market price.

See our complete analysis for Shutterfly

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Shutterfly Acquiring Another Company (~20% Upside)

Why Is An Acquisition A Viable Option For Shutterfly?

  1. Shutterfly’s Strong Financial Performance

In 2014, Shutterfly posted $926 million in revenues, witnessing an 18% year on year growth. The growth was boosted by a 14% increase in the  user base, a 17% increase in orders from its Consumer segment, and increased revenues from its Enterprise segment. The growth received a further lift due to the company’s acquisition of  Groovebook in 2014, and full year results from 2013 acquisitions of MyPublisher and BorrowLenses. [1]

Shutterfly’s gross margin for 2014 stood at 51% reflecting a year on year decline of ~ 200 basis points. The start-up costs of the Shakopee, Minnesota production facility (which went live in Q3 2014), the acquisition of Groovebook, the relocation of the data center to Nevada, were some of the reasons for the dampened margins. However, Shutterfly’s management believes that it will observe healthier margin performance in 2015, as the expenses of opening new facilities get absorbed, and with the growth of its various brands across its mobile and wedding segments. [2].

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  1. Marathon’s Representation On Shutterfly’s Board Is Good News For Shutterfly’s Shareholders

Marathon Partners Equity Management recently won two seats out of three on Shutterfly’s board of directors. Marathon intends to influence Shutterfly in implementing shareholder-friendly reforms. Over the past, Marathon had been critical of Shutterfly’s policies, including lack of incentives for long-term investors and lack of prudent decisions regarding investments and acquisitions.

  • Reforms In Executive Compensation Policy: It is possible that Shutterfly’s management will implement more favorable changes with Marathon representatives on its board. Marathon’s focus lies in reforming executive compensation so that it is tied to earnings and long-term financial goals. Marathon also intends to bring about strategic changes to improve the long-term health of the company. This includes strategic decisions including looking for suitable acquisitions. [3]
  • Stable Management: Shutterfly’s shareholders re-elected Jeffrey Housenbold as the CEO, implying investor’s faith in the CEO. This also implies that the company will not be under a significant management restructuring, thus making it stable to go ahead with another acquisition this year. [3]
  1. Shutterfly’s Management On The Lookout For Takeover Targets

In 2014, speculations were rife that Silver Lake Partners, a private equity firm would acquire and combine Shutterfly and Hewlett-Packard’s Snapfish. However, in October 2014, Silver Lake put the plan on hold. [4]

The merger of Shutterfly and Snapfish—both companies operating in the photo storage and printing space—would have created a bigger entity, expanded the customer base, and posed substantial threat in this market space witnessing continuous influx of players. However, according to recent news, Hewlett-Packard has agreed to sell Snapfish to District Photo, a U.S. digital imaging company. [5]

Under its previously announced $300 million stock repurchase plan, Shutterfly repurchased 1 million shares in Q1 2015, at an average price of $45.16. The company has $264 million of repurchase capacity remaining. Hence, according to its management, along with its organic growth, the company is on the look-out for strategically relevant acquisitions. With the fall-out of the Snapfish deal, we can expect Shutterfly to buy companies that would aid in its user base expansion (similar to GrooveBook) and at the same time help in solidifying its dominant position in the industry. [6]

Shutterfly has a history of acquiring start-ups related to the photography domain. It has earlier acquired companies including ThisLife (photos and videos organizer), Tiny Prints (premium cards and stationery for all occasions), Treat (allows users to create personalized greeting cards), Wedding Paper Divas (wedding related stationery), BorrowLenses (online photo and video equipment rental service), and lately, Grovebook (mobile photo book application). In case of a further acquisition, Shutterfly’s user base is bound to expand. Currently, we forecast Shutterfly’s user base to increase from 9.2 million in 2014 to 16 million by the end of our forecast period. However as a result of an  acquisition, if the user base further expands to 20 million by the end of our review period, then there can be a 20% upside to our price estimates for Shutterfly.

Shutterfly 3.0 Might Enhance Shutterfly’s Brand Value And Improve User Adoption Rates (~20% Upside)

  • Common Platform For All Brands: By 2016, Shutterfly plans to launch the next generation Shutterfly called Shutterfly 3.0. This will integrate the services of its brands such as This Life, Tiny Prints, and Wedding Paper Divas with the Shutterfly flagship brand, into a common platform.
  • Cost Efficiency: This consolidation will prevent investments across different technology platforms and hence, will be more cost efficient for the company.
  • User Friendly: Also, it will be easier for Shutterfly’s users to manage all the brands on a common platform. The company will continue its investments on the individual brands, but all the brands will be supported through a common technology platform, including cart, checkout, creation paths, login, address book, and media storage platforms.
  • Increased Adoption Rates And Monetization: The management expects Shutterfly 3.0 to enhance the rate of adoption of its lesser known brands. Through a common platform, the Shutterfly brand name will add value to the less popular brands. This, in turn, will drive up the monetization. [6]

If Shutterfly’s integrated platform indeed improves the brand visibility for its lesser known services, and hence, increases the value of services ordered per customer, then the order per customer can rise from the current forecast level of 2.4, to 2.6. This, coupled with an increased number of customers, from 16 million to 18 million by the end of our review period, can improve Shutterfly’s revenues.

Shutterfly’s Revenues=(Average Price Per Order) x (Total Number Of Customers )x (Orders Per Customer)

Hence, by the end of our review period, if the customer base increases to 18 million and the number of orders per customer rises to 2.6, then revenues will grow by over 20% more than our current forecast levels. Consequently, Shutterfly’s valuation can potentially increase by around 20%.

 

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Notes:
  1. Shutterfly’s Form 10-K For The Period Ending December 31, 2014, Shutterfly Investor Relations, February 18, 2015 []
  2. Shutterfly’s (SFLY) CEO Jeffrey Housenbold on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 []
  3. What does Shutterfly, Inc. (SFLY) Look Like After Board Shakeup?, Invest Correctly, June 19, 2015 [] []
  4. Shutterfly share losses continue after report of failed acquisition deal, Silicon Valley Business Journal, Oct 13, 2014 []
  5. H-P to Sell Snapfish Photo-Storage Business to District Photo, WSJ, April 21, 2015 []
  6. Shutterfly Q1 2015 Earnings Call Transcript, Seeking Alpha, April 29, 2015 [] []