Our current bull market has elevated many stocks into the stratosphere, but even the most surging tide cannot raise all boats.
Shutterfly Inc. (SFLY, Financial), once a paragon of 21st century technological advancement, used by millions to share and print photos of their most treasured memories, is a company in trouble. Wracked by lagging sales and harassed by strengthening competition from firms large and small, is set to continue its struggles into 2018. Owners of Shutterfly would be wise to let this one go and observers had best steer clear of getting burned.
Business model looking out of date
Shutterfly got its start in the tech boom of the 1990s as a photo-sharing and displaying platform on the then-new and exciting internet. It allowed kids in Iowa to share their middle school baseball pictures with their grandparents in Florida, and for college students in Massachusetts to share memories with their parents in California. It was a fantastic innovation that helped bring people together and store precious memories. The market needed a Shutterfly and it delivered. It weathered the collapse of the tech bubble and continued to thrive for years.
Fast-forward to the present and we see a very different story.
For the better part of five years, Shutterfly’s stock price has oscillated between $35 and $55, never breaking out, nor ever giving up the ghost and falling through the floor or making any kind of significant splash. Shutterfly still has its uses, but the market certainly seems to think those uses are few.
Deteriorating financial performance
Financially, Shutterfly is struggling. Taking a quick look at its income statement shows what trouble it is up against. Interest expense is at an all-time high and continues to drag on profits. Operating income has dropped from $154 million at the end of 2016 to a loss of $36 million in the third quarter, the third straight quarter of losses. And there is no end in sight.
Another metric worth a look is the earnings surprise. In general, it is a great way to measure whether the professional analysts are out of step with reality when it comes to a company’s real-world performance. While Shutterfly has actually outperformed the market’s expectations on an earnings per share basis, net earnings have been stubbornly in the red for the last three quarters, delivering per-share losses of 84 cents, 44 cents and 73 cents respectively. Compare this to fourth-quarter 2016, when the company delivered positive earnings of $2.63 per share.
Why the precipitous drop? Rampant costs.
Cost of operating activities, including marketing, has nearly quadrupled since 2015, standing at $19 million today. That cost increase, coupled with ill-judged stock buybacks, has served to cripple Shutterfly financially and leave it with scant cash flow.
Shutterfly has been bleeding cash lately, a fact evidenced in black and white on the company’s balance sheet. Cost of revenue now exceeds $500 million and has increased precipitously over the past three years. Those massive cost increases have not produced the hoped for increased revenues, resulting in continued quarterly losses for a company that once ran consistently in the black.
Unless Shutterfly can quickly right its financial ship, it will not be afloat much longer. Unfortunately for the company, the environment is only getting harsher.
Swamped by competition’s deluge
Recently, Amazon.com (AMZN, Financial), the world’s largest online marketplace, announced it would enter the photo space. This is bad news for Shutterfly. Amazon, with its hands already in online shopping, newspapers, bookstores, grocery stores and streaming television and film content, will continue to grab for more. Head-to-head, Shutterfly stands little chance. Amazon has a lot of liquidity and a wide reach. This will allow it to play strongly for the photo-sharing business and gobble up many of Shutterfly’s customers. Amazon has long proven its ability to wipe out competitors and offers products and services that simply cannot be matched by smaller, less-equipped, less financially robust competitors.
Amazon is not the only competitor Shutterfly has to fear. Smaller, leaner competitors have cropped up in the market with loyal customer bases and niche offerings. This competition, too, should make Shutterfly nervous.
The verdict
Shutterfly is facing an increasingly uphill battle to perform, and there seems to be no path to get back to serious profitability. As costs continue to mount and revenues deteriorate, the stock will bleed. Definitely avoid this one.
Disclosure: I/We own none of the stocks mentioned in this article.
