Buying The Weakness in Getty Images

I recently initiated a position in Getty Images (GYI), the eBay of electronic images. There's a lot of fear in the stock due to weak guidance and increasing competition. Here's my overview from 8/2 on why I'm long:

Initiating position in Getty Images (GYI) in response to today's -22% crash in share price on lowered guidance. Getty provides stock photos and digital images and is the leader in the biz.

Competition is intense and getting worse. I'll live with that and assume forward economics of the biz will be worse than the past. Company still produces lots of free cashflow and attractive margins and returns. Buying on attractiveness of the high margin/low capex business model, comp advantage in size, low EV/FCF, low P/E, opp to continously consolidate the industry.

More research needed before I'd seriously scale up the position; taking advantage of panic selling today. At risk of further downside volatility short term, but I'm happy with the price here.

Steven Ashley and Jack Miller of Baird summed up some of the attractive elements of Getty's business model in their August 2, 2007 report on the company:

Most of the images offered on gettyimages.com are owned by independent photographers, and are created at their expense. This means Getty's Cost of Goods Sold expense (a photographer royalty) is incurred only if an image is sold and paid for only after Getty Images is paid. Those images that are owned by Getty (~20% of total) are capitalized and depreciated, and therefore carry a 100% gross margin. Thus, the business model has high fixed costs, resulting in significant operating leverage.

COGS are variable or nonexistent, and depreciation reduces taxes even while the asset values remain unchanged. That's one sweet deal.

Disclosure: Author is long GYI

GYI 1-yr chart: