Shutterfly Earnings Preview: Focus on Core Business

Jul.27.11 | About: Shutterfly, Inc. (SFLY)

Shutterfly (NASDAQ:SFLY) is expected to announce its fiscal year 2011 Q2 earnings on July 27. We currently have a $65 price estimate for Shutterfly which implies a 10% upside to the current stock price. Shutterfly is an Internet based personal publishing service which allows you to store your digital images online and print custom photo books, cards and other stationery using your images. It also allows users to create personalized share sites where multiple users can upload their photos and videos and order prints and photo books. Its main competitors are services like HP’s (NYSE:HPQ) Snapfish, Kodak EasyShare Gallery and American Greetings’ Photoworks and Webshots brands. Even Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) now offer low cost digital photography products and services.

Shutterfly makes a bulk of its revenues from its Photos, Cards, Albums and Stationery division which comprises almost 88% of the Trefis price estimate for Shutterfly. Commercial Printing Services contribute to only about 2% of its Trefis price estimate.

Growth Opportunities

We will focus mainly on the core business – Photo Books, Cards and Stationery etc – in this earnings call. The stationery market in the U.S. is estimated to be around $7 billion while the greeting and photo books business is around $14 billion. Since only about 2-3% of this market is currently online, Shutterfly has huge growth opportunities ahead. There are 3 key parameters which Shutterfly’s stock price depends on: average price per order, total number of customers and orders per customer.

(Chart created by using Trefis' app)

Its customer base is currently around 4 million but is expected to increase nearly 20% every year reaching 12 million by the end of the Trefis forecast period. While the average number of orders per customer is expected to stay around 2 the average price per order is expected to increase by nearly 10% year on year, as more and more of the personalized printing market shifts online, with the proliferation of digital cameras and smartphones with cameras.

Since Shutterfly’s business is largely seasonal, we expect it to post a loss this quarter, with revenues and profits picking up in the third and fourth quarter.

Disclosure: No positions