PNI Digital Media (aka Photochannel) was first brought to my attention on this forum. [www.gurufocus.com]
Ever since, I have been sitting on the fence thinking. Last week I fell off that fence.
The bulls are right but impatient; the bears are wrong.
What does PNI do and who are its customers ?
PNI is a Canadian company that hosts retailer’s personlized printing websites. When you go to www.samsclub.com and click on "photo" the site that comes up is samsclub.pnimedia.com. PNI handles everything from uploading images, storing the images online, and sending the jobs to the correct store to be printed. In short, retailers outsource their personalized printing websites to PNI.
What caused me to fall off the fence ?
Shutterfly announced customers are now able to pick up their prints at CVS. Shutterfly used to send all its prints to customers by mail. On the other hand, CVS used to only print images from their own site. It is not hard to imagine that a significant percentage of the prints picked up at CVS stores next year will come from Shutterfly. The deal obviously makes sense to CVS as well as Shutterfly. I expect to see similar deals with other sites and retailers. The brick-and-mortar retailer wants extra customers walking through the door. [ir.shutterfly.com]
Importantly CVS pays PNI 2 cts for every print routed to a store. Yes, that now also includes print jobs they route from Shutterfly's site to a CVS store.
Never mind the profitability of this deal.... PNI doesn't even have to host the Shutterfly site like it does for CVS ! The most important aspect of the deal is that it creates a barrier to entry.
In fairness, Shutterfly also announced a similar deal with Walgreens. Walgreens uses HP hardware and routes its pictures through PNIs only competitor..... Snapfish. Probably because HP owns Snapfish, Snapfish does not like to serve retailers with non-HP hardware.
Summary of the Bull case
For years, bulls (starting with Aaron Edelheit aka Issambres839 on VIC) have argued PNI is going to grow to 200m of revenue. The personalized printing business in the USA is a 10B business (conservatively). If 50% of this is taken by retailers of which 50% are PNI customers (non-HP), of which PNI takes 10% as "routing" fees..... 250m in the US alone. Snapfish "only" has WAG and WMT. Bulls expect the stock to explode when Walmart USA switches to PNI.
PNI serves Wal-mart Canada, UK & Argentina, Costco Canada & US, CVS (U.S.), Black’s (Canada), Kmart (U.S.), Eckerd’s (U.S.), Sam's Club (US), Tesco (UK), Shoppers Drug Mart (Canada), Loblaw (Canada)
That's at least 3B of personalized printing with a growing percentage coming from the web. Customers who used to walk in with their memory cards now realise it makes sense to create stuff online from the comfort of their homes. From a retailer’s perspective, there’s little appeal in consumers tying up kiosks for long periods.
The bulls are impatient. Triple digit growth has not materialised as expected. Organic growth in this case depends on changing customers behavior. For this and other reasons, PNI has only reported double digit growth.
Summary of the Bear case
For years, the bears have pointed to the GAAP bottom line and argued that any expectation of future profits is speculative. Revenue is nothing without margin.
The estimate of potential revenue is reasonable and given that PNI is growing internationally too it's probably conservative. The rate of growth is hard to predict from year to year. Current margins are understated because costs include expenses for growth and are overstated.
Walmart USA unlike Walmart Canada is unlikely to switch to PNI. Walmart just finished installing HP kiosks nationwide..... they get the Snapfish service "for free". HP would probably rather buy Kodak and/or PNI than lose Walmart USA.
Everyone has his/her own method so I will not get into too much detail. No projections, just current data.
1) A company that grows unit volume for years at double digit rates without taking on debt or significant dilution is from an owners perspective, extremely profitable. 1x TTM revenue with christmas yet to come => C$ 50m
2) 5m of TTM FCF which is likely understated because the holiday season is yet to come... costs stay flat but operating income is mainly from the holiday season..... 10x FCF => C$ 50m
3) HP’s 10-k for the year 2005 mentions five acquisitions totaling $645m. Snapfish was the largest. The cost of the largest acquisition should be at least equal to the average. 645m/5 => US$ 130m.
Snapfish is comparable in every way and PNI has taken Sam's Club and Costco from Snapfish since then.
In short, you are not paying much for growth.
Barriers to entry
1) PNI stores your photos for free. Once they're online, you can order them again and again without uploading them. This is sticky. A retailer wishing to outsource to another company must copy all the data while maintaining service to its customers..... nah.... that's not a barrier. The guy selling me this new software says he'll do it in february when nobody wants to order pics and he can do it without a hitch.
2) There are economics of scale. This is the reason retailers outsourced thier sites in the first place. PNI's costs are in storage and bandwith. The more you need, the cheaper it gets. I estimate PNI has about 250 - 1250 Terabytes of storage depending on how they store the data.
- note - Storage and bandwidth..... depreciation charges of PNI overstate replacement cost !
We have a one foot hurdle.
3) PNI connects a site to various HP and non-HP kiosks. PNI spent 10m - 20m developing this software. An individual retailer will not build its own stuff. Kiosk sellers might want to. This is precisely why HP bought Snapfish.
We raise the hurdle another foot.
4) PNI now connects diverse sites (non retailer sites) to retail outlets....... THAT is what caused me to fall off the fence. If PNI connects say.... five sites to your store including your own site..... you have no hope. You do not want to swith to some other guy. You will not be able to recoup the loss of revenue ....you are lost.... Aaaaaaahhhhhh...... I'll pay the bl33ding two cents and try to squeeze those cents out of some other supplier.
Your only hope is to call Snapfish. You don't want to do this.... HP sells what are basically high volume photo printers. Nothing wrong with that but you and the sites you partner with want to offer your clients personalised mugs and other high margin stuff. HP doesn't do that so Snapfish won't want serve you.
In short, PNI is highly profitable now and is highly likely to remain profitable if and when growth slows. Its core assets are worth much more than book.
- Canadian dollar continues to appreciate rapidly against the dollar. PNI pays its salaries in C$.
- HP takes more than 50% of the market in the US and elsewhere.
- Facebook or someone else decides to create their own PNI to distribute their photos (but to where ?)
- No one prints photos at retail shops in 2020 (or personalised mugs, flags, banners etc.)
- PNI overreaches while trying to integrate say.... Carrefour.
The other 834752 risks I haven't thought of yet.
just my 2 cts; any and all comments and questions welcome as usual.