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Microcap Ideas: Photochannel Networks

Michael,

You could have thrown a dart at IBD stock tables, shorted them and still would have been right in this kind of crazy volatile market. That hardly proves that you are right. Looks like you don't have any kind of response to the arguments presented above.

Microcap Ideas: Photochannel Networks

Michael Goode,

After reading your bear case I had a few questions to ask you.

a) "There has been a clear progression in the industry from everyone going to the photo developer to people printing photos themselves"

Do you have any stats to back up your argument?You mention that more and more people are going to print their pictures at home instead of having it printed somewhere else, but have you calculated the economics of printing pictures at home? I believe its way more expensive to print pictures at home than having it printed commercially. Do you believe that as time goes by, the cost of printing at home will come down and will be more viable than third party printing?

b) "and last I checked, this business is highly competitive" - and you just named one competitor. Are there more than 3 big players in this industry for you to say that its cut-throat competition out there?
You mention that online services like Shutterfly are cheap and high-quality. I don't disagree with that argument- though they are not necessarily cheaper than printing at stores. But have you taken into account the fact that for services like Shutterfly to be competitive, they have to spend tons of money in marketing & advertising to get more customers every year? Have you ever considered that their photo finishing expenses are heavily commodity driven? When silver prices go up and Fuji/Cannon increase the prices of photographic paper ,that will squeeze their margins like anything. Also have a look at Shutterfly financial statements, you will see periodical operating losses.
On the other hand, a company like Photochannel doesn't have any of the above mentioned expenses. It does no marketing and it doesn't have any photo finishing expenses. It gets a transactional fee which can be substantial on high volumes. Snapfish is a real competitor, but recently they lost their Costco contract to Photochannel. What are the chances that they will retain their Walmart contract given the fact that Photochannel runs Walmart photofinishing almost everywhere other than US? I recently emailed Walmart customer service and asked them why Snapfish is giving a better deal online than Walmart even when they were partners and the representative didn't have an answer. (This in no-way means that Photochannel will get US Walmart, but if it does, make sure you cover your short!)

c) On what basis do you say that there cannot be double digit net margins going forward? If you had read the 6-K completely, most of the network costs and SG&A incurred were attributed to the acquisition of Pixology and setting up infrastructure for datacenters to faclilitate the new contracts the company got. So is your assumption is that these costs will not come down or even they will go up going forward?