How Important Is Shutterfly’s Consumer Business To Its Valuation?

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Shutterfly

Shutterfly (NASDAQ:SFLY) performed decently in 2017, with revenue of over $596 million in the first three quarters, an increase of over 4% year-on-year. As a part of its restructuring initiatives, the company shut down the MyPublishers and Wedding Paper Divas legacy site, opened the Shutterfly Wedding Shop and migrated its second largest consumer brand, Tiny Prints, to Shutterfly.com. The decline in the consumer business due to the shutdown of non-Shutterfly brands was reflected in the decline in gross margins. However, a notable decline in operating expenses (nearly 8%) in Q3 also indicates the success of the restructuring and platform consolidation strategy. The company is expecting its restructuring initiatives to be complete by the end of the fiscal year. This should improve its customer experience by consolidating its platform and creating an integrated offering. While this could create issues in the short term, we believe this strategy should drive some growth over the long run with the optimization of technology initiatives and a better focus on brands.

Our price estimate for Shutterfly’s stock stands at $52, which is about in line with the market price.

Consumer Business Remains Biggest Value Driver

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We estimate that Shutterfly’s Consumer business accounts for around 80% of its valuation. We have created an interactive model that details how changes in total orders and average price per order can impact Shutterfly’s share price. You can modify these assumptions to see their impact on the company’s valuation.

 

Average Price Per Order increased steadily over 2011-2013. A major part of that increase can be attributed to the changed product mix, including items such as wedding and premium cards, stationery, photo prints, photo books, and photo gifts. The company had been aggressively promoting its premium product ranges, which boosted the price per order. However, in the past few years the company has seen some marginal declines. Owing to the restructuring plans, we currently forecast the average price to rebound over the coming years, eventually exceeding $40. However, should the growth be slower than expected – due to macroeconomic fluctuations and customers’ reluctance in spending – and the average price goes down to around $34.60 in the long run (Scenario 1), there would be a potential downside of 10% to our price estimate for the company’s stock. Alternatively, if the average price reaches $45 (Scenario 2) due to growth in sales, R&D and marketing initiatives and increased contribution of personalized products/services in the product mix, it could lead to an upside of 10% to the company’s valuation.

Total Number Of Orders increased 2.5x over the last 5 years. E-commerce has been evolving at a rapid pace, which provides Shuttefly a solid opportunity to tap into the growing market. Repeat orders from loyal customers and strategic partnerships with retailers such as Target and CVS have helped the company boost its order count. We forecast the order count to reach around 35.5 million by the end of 2021. If Shutterfly’s customer base expands faster and the order count crosses 38.8 million instead (Scenario 3), due to increased customer preference for online purchasing and Shutterfly’s foray into international markets, there could be a 10% increase in our valuation for the company. On the other hand, in the event of a poor economic environment, if the number of orders declines to 29.8 million, due to increased competition from larger players such as Google Photos and Amazon Prints, our price estimate for Shutterfly would decline by almost 10%.

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