We reaffirm our Neutral recommendation on
) following an appraisal of its fourth quarter 2012 results.
While Shutterfly wrapped up the year 2012 on a strong note,
beating estimates in all four quarters by significant margins,
challenging economic conditions and seasonal headwinds in the
upcoming quarter make us cautious at the current level.
Why the Reiteration?
Shutterfly's recently-concluded fourth-quarter 2012 earnings per
share breezed past the Zacks Consensus Estimate by 38.6% and the
year-ago result by 44.3%. Increased revenues along with efficient
cost containment led to the beat.
In the quarter under review, net revenues surged 33% year over
year, significantly ahead of the Zacks Consensus Estimate,
induced by sturdy sales from both Consumer and Enterprise
According to Shutterfly, the market for social expression
products in the U.S. alone, including one-for-one greeting cards,
birthday cards, holiday cards, baby and wedding announcements,
personalized stationery, and online greetings approximate $12
billion in annual sales. Presently, Shutterfly operates in less
than 5% of this market. Such a limited presence in the online
market leaves a huge room for expansion.
We also appreciate Shutterfly's rapid inorganic growth. In the
last three years ended 2012, Shutterfly took control of about 8
companies. We believe that all these strategic acquisitions augur
well for Shutterfly and enable the company to enhance its
portfolio and provide next generation photo solutions.
Despite sturdy fundamentals, there are some drags that keep us on
the sidelines at the current level. Shutterfly's business is
highly seasonal. The company generates a large portion of its
earnings during the fourth quarter of every year, which is the
holiday season. More than 50% of net revenues are generated in
the fourth quarter, which makes the first quarter seasonally
Additionally, less pricing power in the printing business and
faster-than-expected extinction of print photos due to social
media sharing and adoption of home photo printers are expected to
remain an overhang. Cutthroat competition in an anemic economy
can also affect the company's pricing power in its other
Other Stocks to Consider
Shutterfly currently retains Zacks Rank #3 (Hold). Some others
players in the Internet content providers industry looking
attractive at current levels include
Angie's List Inc.
Giant Interactive Group Inc.
) all carrying a Zacks Rank #2 (Buy).
ANGIES LIST INC (ANGI): Free Stock Analysis
CHANGYOU.COM (CYOU): Free Stock Analysis
GIANT INTERACTV (GA): Free Stock Analysis
SHUTTERFLY INC (SFLY): Free Stock Analysis
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