Kevin Stecyk

Getty Images: No Compelling Argument for Rich Valuation

Thank you for your comments Michael.

<blockquote>the Flickr discussion warrants another question -- Yahoo! owns Flickr. Is this a strategic path they would lead Flickr down. Nonetheless, regardless of Flickr, the same questions applies to any other photo sharing sight. Just today we have word of another site, Imagekind getting an investment from noneother than a Getty co-founder.</blockq...

Yes, I understand that Yahoo! owns Flickr. Is this a strategic path that they would lead Flickr down? Why not? Flickr currently receives $25 per user per year. Imagine the positive impact to Flickr if it can raise its revenue per user by $5+ per user per year. Perhaps it charges those users more who want to be able to sell their images? And Flickr takes a healthy cut from each sale? One of the biggest problems for most companies is customer acquisition. Flickr already has the customers who might jump at the opportunity (read, pay money) for the potential to earn money by selling their pictures. Just a thought.

<blockquote>All that said, before GYI's recent buying spree -- they had a ton of cash on the balance sheet. I'm guessing this is why Blum Capital got involved -- perhaps for a recapitalization. Certainly the market assumed something of th sort when it was announced in Barron's. I would not be surprised if the recent moves by Getty (acquiring a few other sites) have been contrary to what any activist sharehholder would want (signaling a potential poor use of cash). In light of this, I view the called off talks with JUPM to be a positive. It will be interesting to see if Blum and other invested hedge funds (Riverpark, etc.) continue to build their position and translate that into pressure on management for value realizing change, or will they blow out of their positions given Getty's recent buying spree? My guess is they will apply pressure.</blockquo...

In all sincerity Michael, you follow this industry more closely than I do. Let's take look at some quick data from Yahoo! financial for both GYI and JUPM.

GYI


- PEG Ratio (5 yr expected): 1.42 (a bit high)
- Enterprise Value/EBITDA (ttm): 9.328 (a bit rich)
- Return on Assets (ttm): 8.92% (nothing exciting)
- Return on Equity (ttm): 10.40% (okay)
- Qtrly Revenue Growth (yoy): 9.50% (good, strong)
- Qtrly Earnings Growth (yoy): -28.80% (stumbled somewhere)


JUPM


- PEG Ratio (5 yr expected): 1.98 (high)
- Enterprise Value/EBITDA (ttm): 9.422 (a bit rich)
- Return on Assets (ttm): 5.54% (poor)
- Return on Equity (ttm): 6.08% (poor)
- Qtrly Revenue Growth (yoy): 6.30% (okay, but not great)
- Qtrly Earnings Growth (yoy): -98.30% (stumbled somewhere)


Without knowing anything more, I am not excited by either company. Not being an industry insider, my intuitive thoughts are that a stock agency should be an intellectual play. That is, there shouldn't be a lot of infrastructure and capital. Yes, computers and servers are required. But I don't believe that stock photo industry is a capital intensive industry. Yet, when I look at the returns on assets, I don't see high values. Given that assets should low and that they are in the denominator, I would expect a high return on assets. Looking at the PEG and Enterprise Values to EBITDA, I see rich valuations for both companies. I look at the growth in revenues. That metric is strong for GYI, but low for JUPM. And earnings have not been good for either company. I don't see anything exciting for either company.

As I look at it, the future is highly uncertain with Flickr, Google, and and other potential heavyweights entering the space. There doesn't seem to be a large barrier to entry. There are more and more photographers with better and more sophisticated cameras and equipment coming on the market each year.

Again, I don't follow this industry closely. If the stock photo agencies are counting on traditional media of newspapers and magazines, then they are in for more pain. Traditional media is having a difficult time itself. The traditional media companies will force their pain onto their suppliers.

Bottom line: I am struggling to understand why stock photo agencies are a compelling buy. Where is the strong growth? Where is the opportunity to reduce costs? How do they differentiate themselves? In short, I see more negatives than positives. I think consumers win at the expense of the stock photo agencies.