Shutterfly Is Worth $47 On Growing User Base

Shutterfly (NASDAQ:SFLY), the leading online social expression and photo-publishing service, has been fairly volatile year to date in the market and is currently trading at approximately $30, about 60% of our price estimate of $47 for the company. The company enables users to share, print and preserve their memories through its various services. It has outperformed its own expectations twice this year, and we expect it to be stronger as it integrates the Kodak Gallery it acquired recently into its operations and prepares for the key gifting seasons ahead.

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Growing user base will help boost revenues

The company launched a new service ‘Treat’ in April and completed the acquisition of the Kodak Gallery in July. Treat lets users customize existing greeting cards with their own pictures and texts, similar to the services it offers for T-shirts, mugs and calendars. The company has tied-up with Hallmark for access to the latter’s creative and editorial expertise and expects to transform the offline greeting cards market it values at $6 billion into an online one in due course. We expect Treat to bring in new users from other similar service providers who would lack the customization available with Shutterfly. ^[1]

The recently acquired Kodak Gallery can potentially bring in a million new users to Shutterfly as a majority of Gallery users are expected to migrate over their accounts and images. ^[2] Backed by the nearly 5.9 million customers it had towards the end of 2011, we expect a significant jump in the number of users for the Photo, Cards, Albums and Stationary division. We currently estimate the numbers of users to grow to approx. 6.8 million by the end of 2012, however this number may shoot up on account of the Kodak acquisition.

Better service and gifting season could inspire users to spend more

The company expects to complete the integration of Photoccino before fourth quarter, in-time for the holiday/gifting season. The recently acquired Photoccino’s technology would enable users to rapidly sort through their large collections of photos and identify the pictures that best match the specified criteria. The reduction in the time users spend curating large number of photos would enable them to spend more time being creative with in the offerings. We expect the number of orders per customer to jump from 2.15 at the end of last year to 2.34 by the end of our forecast period as the average price per order jumps to $46 by 2019.

Key Risk: Higher infrastructure costs

One of the primary risks to our price estimate is the increase in infrastructure costs associated with aggressive user base expansion. The company will have to invest significantly in new storage space and manufacturing facilities to cater to the expected sharp growth in users. Besides, competition from Apple (NASDAQ:AAPL) and HP’s (NYSE:HPQ) Snapfish could impact the growth of its user base.

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1. Shutterfly Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, July 2012 [↩]
2.  Shutterfly to Snap Up Kodak Site, Wall Street Journal, April 2012 [↩]