ADBE - Shutterstock: A Company In Transition

2024-01-16 23:59:23 ET

Summary

• Shutterstock is a misunderstood company with strong growth prospects and a reasonable valuation.
• The company is transitioning to subscription-based revenue and has upside potential from the recent Giphy acquisition and AI-related data revenue growth.
• Investors should consider purchasing shares in Shutterstock at the current enterprise value of approximately $1.7 billion.

Shutterstock (SSTK) is a misunderstood company that boasts strong growth prospects and a reasonable valuation. The company has a bright future, and a growth investor should purchase shares at the current enterprise value of ~$1.7B.

How the Market Views Shutterstock:

When investors hear the name Shutterstock, they think of the commodified stock image market. They think of a transaction-based business where marketers need a picture such as, “woman drinking coffee”, they search Stock Images, Photos, Vectors, Video, and Music | Shutterstock and pay a one-time fee to download an image. Shutterstock then must pay a portion of this fee to the contributor who uploaded the picture. This transactional relationship isn’t very valuable because it limits visibility into future revenue and faces competition from Getty Images (GETY) and Adobe’s (ADBE) stock business. As a result of this view of the business, Shutterstock currently commands a ~5.5x TTM adjusted EBITDA multiple.

Shutterstock’s New Model:

In February of 2023, Shutterstock held an investor day where they pitched a new way to think about the company. The Shutterstock business is comprised of three separate but symbiotic “engines,” the content engine, the creative engine, and the data engine.

The Content Engine:

The content engine consists of the traditional pay-for-stock content business. The company is exploring multiple avenues to increase the value of the stock content business. The first is to expand from basic images into more content types. Specifically, they offer images, music, video, 3-D models, sound effects, and templates. One of the main ways they’ve built their content library has been by acquisition. In January of 2021, Shutterstock broke into the 3-D world by buying TurboSquid for $75M in cash. In May of 2022, Shutterstock greatly expanded its presence in video and sound by acquiring pond5 for $210M in cash. Shutterstock’s strength in more complex asset types helps the company stand out against the competition.

Shutterstock CFO Jarrod Yahes commented on competition in this episode of the CEO Café Podcast. He summarized Adobe’s offering as a tools-first solution where the tools are the hamburger, and the stock content is the add-on fries. He noted that the solutions are comparably priced, but Adobe has a smaller image library, significantly smaller video library, and very limited presence in 3-D models or special effects. Getty Images is very focused on editorial content. Partially because of the Hollywood strikes, they recently reduced their revenue guidance from $936M – $963M to $920M - $935M and then reduced it again to $900 - $910M. With respect to Adjusted EBITDA, they expect decline of between 3.4% and 5.8% this year. Shutterstock’s established competition consists of a company where content is only a single-digit percentage of revenue (Adobe) and a company that is cutting revenue and EBITDA forecasts (Getty). As such, competitive positioning for the core content engine seems strong and growth will likely be dictated by market share gains and general growth in digital marketing.

The Creative Engine:

The creative engine consists of three main parts, which will help shift the company from transaction-based revenue to subscription-based ratable revenue. The first is an online graphic design tools hub called Creative Flow. Creative flow is based on the 2021 acquisition of PicMonkey which at the time had over 200,000 subscribers. The second contributor is editorial newsroom services buoyed by the purchase of Splash News . In June of 2023, Shutterstock announced they are rolling out editorial subscriptions for the first time ever. Lastly, the creative engine includes Giphy, which Shutterstock recently acquired from Meta for a mere $53M because a UK government ruling forced Meta to divest. There was no meaningful revenue in 2023, but CEO Paul Hennessy is quoted in Adweek as saying, “the advertising opportunity is in the hundreds of millions of dollars.”

So, how does it all shake out? What part of Shutterstock’s revenue is subscription vs transactional? Currently, subscription revenue fluctuates between 38% and 42% of total revenue, with management saying at the February 2023 investor day that they believe they can get this number north of 50% in the medium term.

The Data Engine:

The data engine is the most exciting part of the business and is not valued appropriately by the market. Shutterstock boasts an impressive customer list including the likes of Nvidia, Google, Meta, and LG. On the last earnings call, they announced they’ve signed a strategic deal with Amazon as well. The following chart shows how data revenue has exploded.

The company is in the process of closing another $40M of data partnerships that will be structured to achieve more ratable revenue recognition. As such, the business already has a line of sight into $60M of 2024 data revenue without accounting for the Q4 sales that aren’t signed yet and any 2024 deals. Shutterstock makes it a point to say that they still compensate the contributors whose content comprises the metadata as part of these deals. As such, these 65+% gross margin opportunities. These are often multi-year contracts where Shutterstock delivers consistent metadata refreshes and can upsell additional content volumes and new content types.

Let’s think about what the data opportunity means from an investor standpoint. If there were a private company that pitched venture investors on “we have properly licensed and legal data necessary for AI computer vision models. We have nine figures of revenue that’s grown at 500%+ the last two years and we have 65+% gross margins” that company would be able to raise money at several multiples of Shutterstock’s enterprise value. The only difference is that the company would likely be hemorrhaging cash whereas Shutterstock is generating cash and doing acquisitions.

Valuation:

Shutterstock’s recent GAAP accounting is complicated by M&A-related adjustments from the Giphy deal. The easiest way to evaluate the current valuation is to look at operating cash flow and free cash flow in 2022 and reported YTD 2023. Operating cash flow was $158M in 2022 and Free cash flow after capex and content acquisitions was $98M. Free cash flow from 1/1/23 – 9/30/23 was $97M and operating cash flow was $107M. If you conservatively estimate a current cash yield state of $100M per 12 months, you are paying a price of about 6% cash yield (cash metric/enterprise value) to buy the stock. The point of this is not to be precise, it’s to say that in the context of the Giphy optionality, the exploding data revenue, and the strong competitive content position you are paying a reasonable valuation for significant upside optionality.

Conclusion:

Shutterstock is valued like a flawed transactional marketplace with no growth prospects and no revenue visibility. In actuality, the company is actively transitioning to subscription revenue and has exciting upside optionality from the recent Giphy acquisition and AI-related data revenue growth. Enterprising investors should strongly consider buying shares in Shutterstock at the current EV of $1.7B, a roughly 6% free cash flow yield.

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