AmTech Downgrades Shutterfly, Other Analysts Not so Sure

Shutterfly (SFLY) shares Friday morning have extended Thursday’s slide on concerns about a sharp price cut in the price of 4-by-6 inch prints by Hewlett-Packard’s (HPQ) Snapfish unit, a key rival in the online photo services business.

To recap: As I previously reported, Shutterfly shares yesterday dropped more than 16% as word spread about Snapfish’s December 26 announcement that it has cut its price for 4-by-6 inch prints to 9 cents from 12 cents. That compares to 19 cents from Shutterfly, and 15 cents for Kodak (EK).

In an interview yesterday with Tech Trader Daily, Shutterfly investor relations director Judith McGarry made the case that Shutterfly did not have to respond with a price cut of its own - her take is that Shutterfly has positioned itself as a premium brand, the Lexus to Snapfish’s Ford. And she also notes that prints account for less than half of Shutterfly’s revenues.

That said, the Street remains worried about this issue. American Technology Research analyst Brad Manuilow this morning cut his rating on the stock to Neutral from Buy, asserting that “near-term pricing uncertainty and negative investor sentiment” could continue to pressure the shares. Manuilow says it would a challenge for the company to maintains a 10 cent pricing differential regardless of customer demographics without risking a slowdown in new customer growth. He says a 20% price cut could hit EPS by 10%-20%.

Other analysts rallied to the stock’s defense, while still conceding the potential impact from this issue. Oppenheimer’s Shawn Milne repeated a Buy rating on the stock, though he concedes that EPS could take a 5-10 cent hit from a price cut of 10%-20%. Piper Jaffray’s Aaron Kessler likewise repeated a Buy rating, and asserted that the sell-off is overdone. He says a price cut is unlikely. J.P. Morgan’s Imran Khan repeated his Overweight rating, although he notes that every penny drop in print pricing would knock 40 basis points from SFLY gross margins. Looking at it another way, Natixis Bleichroeder’s Jeffrey Shelton calculates that every one cent drop in print prices translates to a nickel drop in 2008 EPS. Shelton maintains a Hold rating on the stock.

Shutterfly, which Thursday fell $4.18 to $21.52; Friday is off another $1.91, or 8.9%, to $19.61. Finally, let me note one other thing about this situation: Snapfish made this announcement on December 26. It is now January 4. I know a lot of people were on vacation lats week, but it is nonetheless remarkable that it has taken this long for Shutterfly shares to react to the news. An efficient market? Not in this stock.