Time To Take Profits In Shutterfly? Goldman Sachs Downgrades

After an encouraging two months, the ever-volatile Shutterfly, Inc. SFLY has just about maxed its potential, according to Goldman Sachs. 

The stock earned a downgrade Wednesday aligning one analyst with the 20-percent short interest.

The Rating

Goldman Sachs analyst Christopher Merwin downgraded Shutterfly from Neutral to Sell and maintained a $46 price target.

The Thesis

Shutterfly’s 31-percent run since November is reflective of tax cut benefits and investor optimism, Merwin said in a note. (See the analyst's track record here.)

Merwin said he expects decelerated growth as Shutterfly suffers increased competition from Amazon.com, Inc. AMZN, market saturation and non-core brand closures.

“While we believe growth should rebound in the following quarters after lapping brand closures (we’re modeling flattish growth in 4Q17E), we struggle to see growth returning to the mid-single-digits or higher, which is what we believe is necessary for the stock to positively re-rate in the coming quarters,” the analyst said. 

At the same time, Goldman expects improving enterprise growth to yield a lower margin, and resulting compression may limit anticipated upside to earnings before interest, taxes, depreciation and amortization.

“If Shutterfly is able to show that Amazon is not taking meaningful share, there is still room for structural growth in photofinishing, and that there is further room for operating leverage, we could become more positive on the stock, as current pricing would then imply an inexpensively valued, high free cash flow yield business with plenty of runway,” Merwin said. 

Price Action

At the time of publication, shares were trading down 1.62 percent at $51.77. 

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