Shutterfly's Strategic Efforts Bode Well: Should You Hold?

Shutterfly, Inc.’s SFLY focus on product innovation, acquisition of Lifetouch and improved operational efficiency through major restructuring bodes well for the company. Consequently, shares of Shutterfly have witnessed a significant gain of 53% in a year’s time against the industry’s decline of 15.7%. However, seasonal demand and possibility of an increase in costs remain concerns.

Growth Drivers

Shutterfly’s growth potential lies in its innovative products and business model differentiation. Continual expansion of its product range is an integral part of Shutterfly’s strategy. The company launched more than 20 new products in personalized gifts and home décor in 2017 in order to entice new customers and generate a higher number of orders. Moreover, the company is making progress with Shutterfly 3.0 initiative, under which it created a new photo-management solution by integrating ThisLife technology. This is expected to improve customer relationships and drive sales over time.

Also, the company’s focus on personalized products leads to competitive advantage and business model differentiation. Further, the sale of its products through e-commerce adds to its competitive strength. Moreover, the company’s focus on profitable and cost-effective brands widens its competitive moat. This even led to a major restructuring of its existing brands that helped it to improve operational efficiency and create a quality brand portfolio.

We further believe the company’s deal to acquire Lifetouch, a privately held online photography entity, will help it to significantly expand customer base and boost consumer segment revenues. To this tune, the company expects to further add approximately $780 million to $790 million to its adjusted revenues and $100 million to adjusted EBITDA over the first nine months of operations. By 2020, the company targets a minimum $450 million of adjusted EBITDA.

The aforementioned strategic efforts have helped the company to report better-than-expected results in the trailing four quarters. In fact, its second-quarter earnings marked the 70th consecutive quarter of year-over-year net revenue growth. In the reported quarter, the company’s top line surged 112.1% year over year owing to the acquisition of Lifetouch and robust performance of the Shutterfly Business Solutions segment.

Headwinds

The company’s business is impacted by consumer spending in the United States. Uncertainty in the real estate market and home values, fluctuating energy and commodity costs and limited credit availability are the major factors that hurt consumer spending patterns.

Additionally, fluctuations in sales due to seasonal demand for digital camera, driven by vacation and other travel trends, hurt its profits. The company’s business is highly affected by softness in the travel industry due to macro-economic slowdown or political instability. Further, costs related to accelerated development of new production facilities along with a rise in manufacturing, labor and training costs are likely to hurt the company’s margin.

Zacks Rank & Stocks to Consider

Shutterfly currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Computer and Technology sector are TechTarget, Inc. TTGT, Xilinx, Inc. XLNX and ACI Worldwide, Inc. ACIW, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TechTarget has an expected current-year earnings growth rate of 68.2%.

Xilinx delivered an average positive earnings surprise of 6% over the last four quarters.
     
ACI Worldwide reported better-than-expected earnings in the trailing four quarters with an average beat of 69.7%.

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