Author: Barry Randall, Crabtree Asset Management
Covestor model: Crabtree Technology
Disclosure: Long SFLY
Shutterfly (SFLY) has made its name by putting pictures on darned near everything: calendars, photo books, mugs. You name it and Shutterfly has probably covered it with ink. But for a company whose business is all about creating lasting memories and evoking warm and fuzzy emotions, Shutterfly has spent the last year steam-rolling its direct competition (e.g. Snapfish, Kodak Gallery) and fending off newer Web 2.0 players like Facebook (FB), Instagram and Pinterest.
How’s that working out? So far so good.
So much so that we’ve recently purchased Shutterfly for our Crabtree Technology model on Covestor, because we see Shutterfly doing all our favorite things: generating cash, rationally taking market share and generally executing as a business model.
Shutterfly has been around since 1999 and is now the acknowledged leader in post-photo products and services with about 50% of that market. Its web site had 12.2 million monthly unique visitors (MUVs) in July, up 40% year-over year. Shutterfly.com is the 225th most popular web site in the U.S. By comparison, its biggest competitor, Hewlett-Packard’s (HPQ) Snapfish, had 3.4 million MUVs, down 20% over the same time frame.
And Snapfish is only number two because Shutterfly bought then-#2 player Kodak Gallery in April of this year for the bankruptcy-bargain price of $23.8 million. Kodak Gallery brought with it 70 million registered users and 5 billion photos, assets Shutterfly is ahead-of-schedule in integrating.
Recently, a couple of comments by Shutterfly CEO Jeff Housenbold put things in more blunt terms. In an interview on Yahoo Finance’s web-only Breakout program, Housenbold said, “Our consolidation of Kodak is part and parcel of us continuing to consolidate the industry.” This was followed by his comments at an investor conference on September 5. There, in a response to an audience question about long-term strategy, he used the phrase, “[the] consolidation of Snapfish.” As in, ‘when,’ not, ‘if.’
It seems pretty clear that Housenbold thinks the post-photo product market is worth dominating. But as investors, should we feel that way? After all, there are two pretty well known “risks” associated with this segment. First, is the occasional irrational pricing by its traditional competitors and second is the fear that social media sites (Facebook, et al.) already offer zero-cost photo sharing.
Pricing has certainly troubled Shutterfly in the past, most recently in the Fall of 2011 when Snapfish began heavily discounting some of its more popular holiday-themed products. Shutterfly had to respond with some promotions of its own and its stock price fell from around $40 on October 1 to less than $25 by year-end. What’s different now? Kodak Gallery is now part of Shutterfly, increasing the latter’s brand power and the economics of its manufacturing facilities. Snapfish’s web traffic is down 20% year-over-year and it remains part of Hewlett-Packard, a huge company floundering to find its feet.
What about the threats posed by Facebook, Google (GOOG) (Picasa), Twitter (Photobucket) and Yahoo (YHOO) (Flickr)? These players are certainly formidable when it comes to on-line photo sharing, but are non-factors in the post-photo, “hard-copy” real world of calendars, photo books and, yes, iPhone covers. Moreover, Shutterfly and Snapfish users already have the ability to cut and paste photos shared on social media back to their sites for impression on physical products.
Shutterfly isn’t exactly avoiding newer, social-based technologies. The company has been actively utilizing Facebook’s new Exchange ad-network program. According to Bloomberg, for every $1 invested in Facebook ads, Shutterfly has been generating $40 in new sales, over 6x better than current returns on ad dollars.
Shutterfly suffered for years from the perception that it was a “dot-com,” trying to make money “on-line.” Now, perception is much closer to reality: Shutterfly is a printed products company, whose customers create products on-line and whose two ultra-modern manufacturing facilities use yield management software to optimize printing jobs. Shutterfly’s web site isn’t especially impressive, but its 50%+ gross margins and mere 7% of revenue spent on capital expenditures sure are.
Shutterfly looks to us like a very solid investment right now and potentially an attractive M&A target for some ultra-well-capitalized social media sites. Facebook, Google and Yahoo certainly have plenty of photographs. Some are even SFW.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. [Investment Adviser] believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
Shutterfly is held in client accounts as of 9/20/12. This investments may or may not be currently held in client accounts.Other investments discussed in this presentation are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
