Personalized items business accounts for almost 80% of our
valuation for Shutterfly (
SFLY
). These products include photo books, greeting cards, wedding
invitations and stationary. In FY 2012, the company registered
about 20% growth in the number of paying users and 30% growth in
the number of orders processed. The two drivers support about 35%
growth in revenues from the business during the period. This
performance has seen the market being bullish about the company's
prospects, which has pushed the stock to about $43, up almost 50%
from the $30 levels at the start of January 2013.
In this article we take a look at the factors which support our
$38
Trefis price estimate for Shutterfly
.
Check out our complete analysis of Shutterfly
A Cloud-Based Tool Can Drive Growth In The Number Of
Paying Users
Last year, the number of paying customers to Shutterfly's
personalized items service grew at about 20% to about 7 million.
The growth was largely inorganic, driven by the acquisition of
customers from the now defunct Kodak Gallery and Fujifilm's
SeeHere. A similarly large growth in 2011, was majorly on the
account of acquisition of the assets of Tiny Prints.
The company currently hosts about 18 billion photographs
on its servers for free for about 35 million customers. It
estimates that about 80% of these customers are females in the 25
to 50 age group. At first look, these figures point to Shutterfly's
failure in converting a majority of its customers into paying
customers despite its varied product portfolio. However, it also
points to a large potential for organic growth for the company that
can be achieved without large capital investments.
Shutterfly seems to be at work in realizing this untapped
potential. In the recently held Morgan Stanley Technology, Media
and Telecom Conference, Shuttefly's CEO, Mr. Housenbold, pointed to
its experiments with a cloud-based service, which could be used to
pull in customer's photographs from varied sources such as Facebook
and Picasa, for storage and then organized through proprietary
patented algorithms. Its recent acquisitions, ThisLife, and
Photoccino have proved helpful in this regard. It plans to launch
the cloud-based tool later this year. The utility of the tool is
promising and we expect a rush to sign up for the service.
While the storage of photographs and videos on Shutterfly's
cloud is expected to be free of cost, the company plans to charge
for the sorting algorithm and other services attached to the
cloud-based tool. The attached fee leads us to expect that the
number of people signing up for the free media storage on
Shutterfly's cloud to be much larger than members paying for the
service. We expect the attached fee to slow down the initial
adoption and hence estimate the number of paying customers to grow
to about 8 million in the near term. The relatively smaller number
of paying users for the service is expected to pressure the
company's margins in the near term.
The Company's Open To The Idea Of Acquiring HP's
Snapfish
Shutterfly pioneered this industry in 1999 and since has grown
at impressive rates. In comparison, other similar ventures from the
likes of Yahoo, Sony, HP, Kodak, Cannon, AOL, Microsoft, Apple have
not had similar success. Last year, the company acquired assets
from Kodak and FujiFilm, and is open to acquiring more. It
currently estimates HP's Snapfish to be its biggest competitor and
that it is about 5 or 6x bigger than Snapfish.com. The company is
open to having a look at the Snapfish business for acquisition if
and when HP decides to jettison it. We believe that another
acquisition will help the company better our estimates for the
growth in paying users. We will be looking for any news in this
regard in the coming months.
Margins To Take A Hit As Company Invests In New
Products
In order to maintain its position as a market leader, the
company has been investing heavily in technology and marketing.
Also, its recent acquisitions have resulted in increased
investments in IT infrastructure. We believe that the company will
keep on investing into technology and marketing as it launches new
cloud based tools. Similarly, the company has been marketing its
services through television which is a cost intensive activity. We
believe that it will continue doing so in the near term. This will
result in its operating margins being under pressure in the near
term. In the long term, we expect the competition to catch up,
which could see the company cutting its margins to stay
competitive.
We have a
$38
Trefis price estimate for Shutterfly
, which stands nearly 10% below its market price. Personalized
photos, cards and albums account for most of its value.
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