2023-09-06 09:00:00 ET
Summary
- Shutterstock's revenue is slowing down and the company is being re-priced as a maturing company.
- Profitability, user engagement and low to no debt are still strong areas for the company.
- There's no shortage of growth opportunities, but the current environment makes it hard to expect growth until 2025.
- Relative to past valuation, Shutterstock trades at its cheapest valuations in the last 3 years.
Introduction
Shutterstock (SSTK) has been falling out of favor with investors again despite having a recent rally sparked by an expanded AI partnership with OpenAI. As it is right now, Shutterstock trades at levels not seen since July of 2020, which brings forward my belief that the stock and the company is becoming a maturing value play.
My focus for this article will be on their recent earnings report to try to decode what sparked the new 52-week low in the stock and provide arguments as to why Shutterstock may be a better buy for the long-term investor now.
Company Profile
Before starting, it's key to understand what type of business Shutterstock runs. Under multiple brands, Shutterstock runs their "e-commerce" business where they license content from people who upload to their platform for users needing a certain type of content to utilize in their projects. Their 2022 10-K filing lists 4 types of content that they license: images, footage, music and 3D models. The content by definition is crowd sourced unless a customer needs something more specific, which is when Shutterstock Studios, one part of their enterprise segment, comes into play.
Earnings Review
To begin, let's look at some key takeaways that I was able to take from the earnings transcript (prepared remarks). Reading through, the business is relatively healthy thanks to the company's strong profitability and user engagement. Their enterprise or data segment, which from what I understand aims to provide businesses with imagery for corporations and data for AI training, has been the brightest spot and what seems to be holding the business's growth afloat with a 22% revenue growth.
With that said, one would expect that would provide an argument for this being a growth company valued at growth valuations (think 5x+ revenues and 30x+ EPS), however their enterprise segment consists of $96 million of this quarter's revenues, or around 46% of their revenues. Enterprise is helping the company grow, but their only other segment is currently in decline.
Seeing as how investors can be prone to focus a lot on whether every segment is growing, I can understand how the stock price can be affected by Shutterstock's primary e-commerce segment revenue down by 12%. Yet, because this is 54% of their revenues now, further declines will have less of an impact. However, looking at page 19 of their Q2 2023 10-Q filing , last year recorded a much larger difference between both segments' revenues, which explains why growth was sluggish in the quarter.
The good news is that if a 22% increase in enterprise and a 12% decrease in e-commerce were to happen again, as shown by these hypothetical numbers, growth would increase net-net by 3.8% instead of just below 1%.
Repeat scenario | Q2 2023 | |
E-commerce | 98,475k | 111,903k |
Enterprise | 118,263k | 96,937k |
However, with a maturing business like this, it is generally understandable why such a reprice would happen. I believe this is the right way to go and makes Shutterstock far more buyable than ever (which will be supported later in the valuation segment).
Now that I covered the case for a conservative "value stock" valuation, what could be the case for a multiple expansion?
Based on what the earnings call's prepared remarks show, there are five catalysts for further growth:
- Giphy (advertising)
- AI indemnification
- Shutterstock Studios (enterprise)
- Influx of contributors
- Generative AI model training
In all five catalysts I read and see that there is great interest. The last catalyst's case in particular shows some success, which can help spark newfound growth in the company.
However, my expectations are for some slowdown or declines to happen between now and the end of 2024, so it might not be until 2025 until I can see growth attributed to any of these five as probable.
The main challenge to growth is that part of Shutterstock's business model is affected by the consumer. If the consumer isn't creating or spending, then there's less incentive to advertise or use stock content as an additional expense for creative or marketing projects. A slowdown or decline in the economy would be accompanied by a slowdown or decline in the company's two segments.
However, I cannot predict when or if a recession will happen - only expecting a downturn in the medium term. I can't provide more specifics aside of my caution as an investor.
This is the main part as to why I believe the company is fairly priced, since its stock price reflects an incoming slowdown to decline as half of its business was in contraction this quarter.
Finally, that takes us to the arguments for contraction. While their e-commerce segment is one primary argument, there is another interesting note from CEO Paul Hennessy that matches some of the sentiment I feel around generative AI:
"Although customers are experimenting and creating [AI generated] images in large quantities, they are not however downloading such images and substituting them for original [non-AI] content"
The square brackets are placed to clarify if he's talking about AI or non-AI content. I think this can be a boon for Shutterstock to some extent on their original content business but will throttle arguments in favor of AI being a massive growth catalyst. As for my sentiment around generative AI, it's in a state where it's hit or miss. A lack of copyright protection because a machine made such images provides little incentive to license such images due to the fact you can just create your own images.
The value of stock images is that they're already copyright protected, and the special niche of Shutterstock Studios makes it possible to service customers with more specific requests in the same way you can commission an artist to make a specific drawing for you with a specific level of quality in mind.
This can also drag down some revenues as well, because if people don't find value in licensing copyright-protected content, then nothing's really stopping them from using AI generated content using their own prompts instead. It counts as public domain , so they are equally as able to use it as is freely or build upon what AI created for them.
A lack of a foreseeable recovery both from myself and management as well as the uncertainty that marketing expense increases brings provides some ground to expect a slight contraction in revenues and EPS in 2024. Both of these depend on the consumer, and marketing depends on the company's ability to persuade the consumer they need their products.
Still, my expectations are subjective and are based on what I managed to learn about the environment and the company within the scope of this article. I can be wrong, so it's best to do your own research and come to your own conclusions.
Valuation
For the company's valuation, I'll start by providing a key point that demonstrates that Shutterstock is at its cheapest point in the last 3 years.
Let's start with the fact that Shutterstock is trading at levels not seen since July of 2020.
As Seeking Alpha shows in Shutterstock's ticker page, their revenues for 2020 were 20% lower than 2022 and 2019 had very similar numbers.
Next, if we look at their EPS for 2020 we can see below that there was an increase in profitability that year. This trend continued through 2022 and investors project this to continue between 2023 and 2024.
This explains the contraction in trailing P/E shown by the chart below.
With forward and trailing P/E at their lowest levels, investors might wonder if there was a change in share count that could have affected this valuation metric. A quick look reveals that Shutterstock's share count has remained flat.
A way to explain the multiple contraction could be that once Shutterstock achieved the potential investors perceived in earlier years, as shown by higher multiples, the market adjusted the stock's valuation to reflect slowing growth and lower upside potential. This is may be seen in companies that are maturing out of their growth stage.
Finally, before valuing the company, I'll list the methods first. I'll be utilizing a P/E ratio of 15x, a free cash flow ((FCF)) ratio of 15x, and a revenue (P/S) ratio of 3x. Normally, I would use multiples of 20x for P/E and P/FCF, and a P/S of 4x, however as I expect stagnation or a decline, I'm opting for a more conservative valuation. Finally, I'll tap into the company's equity to help see how many dollars of share price is backed by equity.
Before proceeding, I'll note the formula I'm using for FCF is Operating Cash Flow minus Capital Expenditures (Capex), the latter of which is shown as its own separate item.
The numbers for each metric will be as follows:
- EPS: $4.19
- FCF: $147.4 million
- Revenues: $850 million
The numbers are all looking forward into fiscal year 2023. EPS was found in Seeking Alpha's ticker page for Shutterstock as the forecast for FY23. FCF comes from using the formula on the numbers shown on the company's Q2 2023 cash flow statement and then multiplying it by 2, which assumes performance similar to the first half of 2023. Finally, the revenue estimate is based on management's lower end of their guidance rounded to the nearest "10."
Total stockholder's equity stood at $519 million as of Q2 of 2023, which is 51.7% of their total assets. This means there's $14.41 per share (on 36.028 million shares) of equity backing up the stock price at the moment, which I believe is very good and shows that this company is financially healthy and would have more flexibility in a downturn.
Finally, here's the results of these calculations:
Expected 2023 | Multiple | Share Price | Market Cap | |
Revenue | $850M | 3x | $70.78 | $2.55B |
FCF | $147.4M | 15x | $61.37 | $2.21B |
EPS | $4.19 | 15x | $62.85 | $2.26B |
When combining all three valuations together with equal weighting, they average around $65 per share. I will use this average for my price target, but do note that no valuation method is perfect. This information aims to let readers know where Shutterstock would stand with each valuation metric; however, I understand that some investors consider them basic or outdated.
Some last points I'd like to present includes the company's $96 million remaining from their recently announced share buyback program. Assuming that money purchases shares averaging at a price of $41 per share, which is near Shutterstock's closing price of $41.64, that money would buy 2.341 million shares of the 36.028 shares outstanding, or just around 6.5% of it. This would potentially boost fair value and EPS by 7% assuming no dilution (such as treasury stock returning to the market via acquisitions or stock compensation) occurring by the time the program depletes its allowance.
As for the pacing of buybacks, Shutterstock's Q2 cash flow statement lists an item noting the repurchase of shares (repurchase of treasury shares) worth exactly $4 million. Management noted in their earnings call that it happened the same quarter that this program was announced, so it would be reasonable to expect that as long as Shutterstock remains at low valuations, management will be enticed to buy back their shares. Assuming a similar pace as this quarter, the buyback program will use its full allowance by 2026. By then, anything can happen, from increasing the pace of buybacks or reigniting growth in the company once more, which makes relying on that extra value difficult, but still worth at least mentioning in case management completes their stock buyback faster than anticipated.
Finally, the company is nearly debt free. They only have $30 million drawn from their revolving credit facility, and that's a short-term debt they can pay off with their abundant cash flows.
As for the rating and price target, I could consider it a Super Buy if there weren't many uncertainties about the macroenvironment, but I want to be conservative as the strategy I have is to acquire shares over time. For my liking, this strategy is better thanks to the power of dollar-cost averaging, which helps insulate against short-term movements. Because of the nature of the strategy and the macroenvironment, my rating will remain a Buy as to not reflect a sense of urgency. My price target of $65 per share does imply over 50% of upside, but I can't say it convinces me to take any strong actions in the near term.
Conclusion
In the end, Shutterstock's latest earnings report shows significant declines in their legacy e-commerce segment while enterprise had a great quarter this time. There's several products that are showing potential and one that is seeing some degree of success thanks to partnerships with companies like OpenAI.
However, it's worth being cautious and treat the company as a maturing company until its growth is reignited. Shutterstock could be affected by a decline in the overall environment, which I expect it to have an effect on the company's 2023 and 2024 results.
However, with my current valuation measures, the stock is undervalued thanks to a shift in sentiment, and trades at the cheapest levels in the last 3 years.
As a maturing value stock, I rate Shutterstock a Buy with a price target of $65 combining the valuation metrics shown above.
For further details see:
Shutterstock's Earnings Show Its Value As A Maturing Company