Shutterfly (NASDAQ:SFLY) announced its Q3 2011 earnings more than a month ago, with a moderate increase in revenue year-on-year. Q4 has traditionally been the most crucial period for Shutterfly every year with holiday spending driving its primary business – Personalized Products and Services. Shutterfly enables users to store and share their own images and create custom printed photobooks, cards and albums using them. It competes primarily with services like HP’s (NYSE:HPQ) Snapfish, Kodak’s EasyShare Gallery, American Greetings’ Photoworks and Webshots brands, and now even Apple (NASDAQ:AAPL) which recently ventured into this business, with the Cards app on iOS.
We expect it to post strong numbers in Q4, but its stock has taken a massive hit in the past month, shedding nearly a third of its value. It is currently near its 52 week low; our revised $40 Trefis price estimate for Shutterfly currently stands nearly 35% above its stock price.
Shutterfly’s stock has cratered due to many reasons; here are some of them:
Shutterfly’s stock price has been hammered significantly by the European debt crisis, which triggered a massive sell-off in the broader market. However, while the broader market has recovered some of its value, Shutterfly stock remains at its 52-week low as its business is driven primarily by discretionary spending by U.S. consumers, which is expected to be lower than usual this holiday season.
Increasing Competition & Margin Pressures
Shutterfly’s stock also saw a significant drop when an analyst expressed fears that HP’s Snapfish, its primary competitor, would cut down prices aggressively in order to spur sales.  Such a move by Snapfish would force Shutterfly to engage in a price war, pushing down its operating margins significantly.
You can see how any changes in its gross margins impact Shutterfly’s stock price estimate, using this chart.
While not a direct threat, Apple’s recent entry in the online photo and card printing segment could also have some impact on Shutterfly’s sales in the crucial holiday quarter. Shutterfly also recently experimented with daily deals via Groupon and Living Social, which could further hurt its traditionally high margins by bringing in marginally profitable, bargain hunting customers who are unlikely to bring in repeat business for Shutterfly.Notes: