Shutterfly Upgraded to Outperform - Analyst Blog

We recently upgraded our rating on Shutterfly Inc. (SFLY), a leading provider of Internet-based social expression and personal publishing service, from Neutral to Outperform. The rating was upgraded on a host of factors including better-than-expected third quarter results, seasonality of demand, WMSG acquisition, strategic partnerships and continued margin expansion.

In the third quarter, Shutterfly reported adjusted loss of 8 cents per share, which narrowed from a loss of 11 cents in year-earlier quarter and surpassed the Zacks Consensus Estimate of 26 cents loss per share. The results were also better than the guidance range of 18–16 cents of loss per share. Quarterly revenues of $49 million also surpassed the Zacks Digest estimate of $47 million driven by strong demand for the photo book. The upcoming holiday season is also likely to act as a key driver of the stock in its ongoing fourth quarter.  

Product innovation, focus on developing a successful commercial printing business, strategic partnerships with retailers and opportunistic acquisitions bode well for the company. Shutterfly enjoys sustained user growth from its tie-up with Facebook. Recently, the company acquired Texas-based digital marketing company WMSG Inc. The acquisition will likely enhance Shutterfly's presence in the commercial printing market. We believe WMSG's digital marketing and print-on-demand solutions will help Shutterfly to strengthen its struggling commercial print business. Moreover, the expansion of its commercial print business will provide an important alternative use for its non-seasonal manufacturing capacity. However, the acquisition will not have a material impact on Shutterfly's net revenue, operating results or cash flow in fourth quarter of 2010.

Further, we believe margins will further expand in the coming quarters backed by technology leverage, shift to higher-margin personalized products and services, owner material costs and labor efficiency.   

Based on the company's fundamentals, we expect the stock to fetch above-market returns and upgrade the stock from Neutral to Outperform. Shutterfly currently retains its Zacks #1 Rank, which translates into a short-term Strong-Buy rating.

The company's competitors include LookSmart Ltd. (LOOK), Snapfish owned by Hewlett-Packard Company (HPQ), Eastman Kodak Co. (EK), and Photoworks and Webshots brands of American Greetings Corp. (AM).

 
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