2023-05-21 04:28:10 ET
Summary
- Shutterstock's transition to a subscription based model modernizes the business.
- The OpenAI partnership gives SSTK a strategic advantage over its competition.
- SSTK is getting a head start on 3D generative AI content with their Nvidia partnership.
- The factors above lead me to a speculative buy rating for SSTK stock.
Introduction
Shutterstock (SSTK) is down ~25% in the past month despite solid recent performance and a strong balance sheet. The company has a 0.07 D/E ratio along with a 34% EPS CAGR over the past 5 years. Moving forward, the company is betting on its revamped business model and generative AI offerings to drive future growth. My valuation model targets a fair value of ~$87.01.
Transition To Subscription Based Model
SSTK continues to transition more towards a subscription-based business model which helps to modernize the business and reduces transaction friction. Previously, customers only had the option of downloading and paying for each piece of content individually. This was not an ideal business model for someone actively searching for multiple pieces of content during their creative process. Having to pay for each piece of content individually interrupts the creative flow and adds unnecessary friction to the creative process. The advantage of the subscription model is that it allocates a fixed number of credits to each user for licensing content. As of the most recent investor presentation , subscription based revenue is now 42% of the revenue mix, up from 34% in 2018. Overall, the transition in SSTK's business model is continuing to prove successful and will be key in their performance going forward.
OpenAI Partnership
SSTK has a strategic partnership with OpenAI as of October 2022. This integrates OpenAI's tools within SSTK and allows AI content to be generated on its platform through keywords input by customers. This partnership has been huge so far in increasing subscriptions to SSTK and also increasing the content of their platform.
In January, we had last reported that users had created 3 million assets in the two weeks immediately following the launch
Although it is not yet clear what the revenue potential of this platform is yet, this partnership is sure to benefit SSTK from a marketing standpoint as it capitalizes on the curiosity surrounding AI at the moment. If SSTK can convert a percentage of all of the new users signing up to their platform to customers of their other product offerings, then this partnership will have near term benefits to the business as well as the long term benefits of being integrated with AI.
2022 10k
3D platform & Generative AI
SSTK is also partnering with NVIDIA (NVDA) to create generative 3D products. Although generative AI is in just the beginning stages, I believe that there will be many future monetizable use cases. Something as simple as avatar generation has already been proven successful with the Lensa app. The app exploded into a viral sensation at the end of 2022, generating over 30 million dollars of revenue in a single month. With SSTK's 3D partnership, they position themselves as an early player in the space, allowing them to gain an advantageous foothold as they continue to add content to their catalogue.
Consensus Estimates & Earnings Growth
EPS is expected to grow from $2.08 in 2022 to $6.76 in 2027, which is a CAGR of 26.55%.
In the following section I will be selecting growth rates for my scenario analysis and valuation. My best case scenario will have the highest growth rate assumption at 25% for the first 5 years. It is also worth noting that this scenario is given a probability of only 10% for my calculation of value.
To be conservative, I will select growth rates slightly below consensus for my normal case and well below for my worst case. The worst case is assigned a probability of 30%, giving it a higher weighting than the best case on the overall calculation of value.
Let's now move on to my calculations of value in the next section.
Valuation & Scenario Analysis
For all my calculations of value, I will be using a discount rate of 10%. 10% is my minimum required return because this has historically been the return you can expect if you decide to just put your money in an index fund that tracks the S&P 500. Lastly, keeping the discount rate the same allows for comparability between different investments.
Also, I assign a weight of 0.6 to my base case, 0.1 to the best case, and 0.3 to my worst-case scenario. With that out of the way, I will move to the individual scenarios.
Scenario 1 is my base case, which assumes 20% growth for the next 5 years and 15% growth from years 5 to 10 with a terminal multiple of 25x. Discounting the 2032 sales price back to present value yields a fair value of $100.34 for an investor with a target return of 10%.
Scenario 2 is my best case, which assumes 25% growth for the next 5 years and 20% growth from years 5 to 10 with a terminal multiple of 30x. Discounting the 2032 sales price back to present value yields a fair value of $182.69 for an investor with a target return of 10%.
Scenario 3 is my worst case, which assumes 10% growth for the next 5 years and 8% growth from years 5 to 10 with a terminal multiple of 15x. Discounting the 2032 sales price back to present value yields a fair value of $28.46 for an investor with a target return of 10%.
The sum of the weighted PVs is $87.01, implying upside of ~66% from current levels.
Risks
Inability to monetize AI content
If SSTK does not figure out how to monetize its AI content, then growth will likely be slower than anticipated.
Oversaturation of AI content
AI art content is everywhere right now and may become oversaturated in the future. It will be key for SSTK to produce the best quality content so that they can become the go-to provider.
Speculative Investment
This is a speculative investment because it is largely based on future growth that will be generated by new and unproven products and services.
Conclusion
Overall, I rate SSTK as a speculative buy due to the fact that the company is betting on the future with 3D & generative AI. Although it is not yet clear whether these bets will pay off, the risk reward is attractive based on my scenario analysis.
For further details see:
Shutterstock: All Eyes Toward The Future Of Generative AI