2023-05-17 15:44:47 ET
Summary
- Shutterstock, Inc. reported its Q1 2023 financial results recently.
- The firm provides still image, audio, video and AI generated content worldwide.
- Shutterstock is seeking to adjust to the new possibilities and challenges of generative AI for all forms of media.
- I'm Neutral [Hold] on Shutterstock until we see that it can produce meaningful revenue from its AI offerings.
A Quick Take On Shutterstock
Shutterstock, Inc. (SSTK) reported its Q1 2023 financial results on April 25, 2023, beating revenue and EPS consensus estimates.
The firm provides still image, audio and video content to customers worldwide through its website and related applications.
SSTK is now pursuing generative AI technologies in a bid to augment its existing platform.
While it is still early days and Shutterstock, Inc. has ample resources to build or acquire technologies, the transition to generative AI business will take time and may not result in a fast enough transition to a replacement business model, especially with large technology companies as competitors.
Given these risks, I'm Neutral [Hold] for Shutterstock, Inc. stock in the near term.
Shutterstock Overview
New York, NY-based Shutterstock, Inc. was founded in 2003 to provide stock image and video capabilities to clients needing content products.
The firm is headed by CEO Paul Hennessey, who has been with the firm since April 2015 and was previously CEO of Vroom and Priceline.
The company's primary offerings include the following:
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Images
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Video clips
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Music tracks
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AI-generation tools.
SSTK acquires customers through direct sales and marketing efforts as well as through online marketing, social media and search engine marketing.
Shutterstock's Market & Competition
According to a 2022 market research report by Technavio, the global market for stock images is expected to grow by $1.34 billion from 2021 to 2026.
This represents a forecast CAGR (Compound Annual Growth Rate) of 5.79%.
The main drivers for this expected growth are the growth in the use of online digital content and the use of social media.
However, declining profit margins may hamper the growth of the industry, especially with the advent of inexpensive or even free alternatives such as AI-generated still image, audio and video content.
Also, a market summary appears in the graphic below:
Major competitive or other industry participants include:
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Adobe
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Can Stock Photo
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Death to Stock Ltd.
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Depositphotos
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Dissolve
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Getty Images
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Ingram Image Ltd.
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Inmagine Group
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Masterfile Corp.
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NHK International
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PA Group Ltd.
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Pexels GmbH
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Pixabay GmbH
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PIXTA
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Snapwire Media.
Shutterstock's Recent Financial Trends
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Total revenue by quarter has grown per the following chart:
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Gross profit margin by quarter has been trending lower recently:
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Selling, G&A expenses as a percentage of total revenue by quarter have been dropping in recent quarters:
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Operating income by quarter has been trending higher:
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Operating leverage by quarter has moved down sharply in the most recent quarter:
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Earnings per share (Diluted) have increased markedly recently:
(All data in the above charts is GAAP.)
In the past 12 months, SSTK's stock price has fallen 17.27% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) rise of 9.58%, as the chart indicates below:
For the balance sheet , the firm ended the quarter with $95.8 million in cash and equivalents and no debt.
Over the trailing twelve months, free cash flow ("FCF") was an impressive $155.2 million, of which capital expenditures accounted for $47.3 million. The company paid $36.6 million in stock-based compensation ("SBC") in the last four quarters, among the highest in the past eleven-quarter period.
Valuation And Other Metrics For Shutterstock
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.2 |
Enterprise Value / EBITDA | 11.3 |
Price / Sales | 2.3 |
Revenue Growth Rate | 6.9% |
Net Income Margin | 9.8% |
EBITDA % | 19.5% |
Market Capitalization | $1,910,000,000 |
Enterprise Value | $1,860,000,000 |
Operating Cash Flow | $202,500,000 |
Earnings Per Share (Fully Diluted) | $2.27 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:
Assuming generous DCF parameters, the firm's shares would be valued at approximately $51.28 versus the current price of $51.88, indicating they are potentially currently fully valued, with the given earnings, growth, and discount rate assumptions of the DCF.
Commentary On Shutterstock
In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023's results, management highlighted the aggressive actions it is taking to bring generative AI technologies to its business customers.
Leadership says this opportunity will start generating revenue in the coming quarters, but it has not yet done so in any meaningful way.
So, the company is seeing strong growth in traffic but has not been able to monetize it yet.
I'm concerned that consumers have little need to pay a Shutterstock when major platforms offer AI-generated image production capabilities for free or nearly so.
Management did not disclose any company retention rate metrics for its subscription-based offerings, but characterized them as 'higher retention with churn declining by 4% year-over-year.'
Total revenue for Q1 2023 rose 8.1% percent year-over-year and gross profit margin dropped 1.5 percentage points.
Selling, G&A expenses as a percentage of revenue fell 3.5 percentage points year-over-year and operating income rose 19.5%.
Looking ahead, Shutterstock, Inc. management said that the company expects revenue growth of 2.5% at the midpoint of its guidance range, with most of that growth coming in the first half of the year.
If this growth rate is achieved, it would represent a material drop in the growth rate from the prior year.
The company's financial position is strong, with ample liquidity, no debt and significant free cash flow generation.
Regarding valuation, my discounted cash flow calculation indicates the stock may be fully valued at its current price.
From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
I'm most interested in the frequency of potentially negative terms, so management cited "Macro" five times.
The negative term refers to management's belief that most of the current decline in ecommerce is due to macroeconomic factors rather than something the company is getting wrong.
The primary risk to the company's outlook is whether it can manage the transition to generative AI technologies and build a replacement subscription business quickly enough to replace its legacy stock model.
I'm skeptical. While it is still early days and Shutterstock, Inc. has ample resources to build or acquire the necessary technologies, the transition will take time and may not result in a fast enough transition to a replacement, especially with large technology companies as competitors.
Given these risks, I'm Neutral [Hold] for Shutterstock, Inc. in the near term.
For further details see:
Shutterstock Races To Build Generative AI Business As Growth Slows