Shutterstock (NYSE:SSTK) is an absolute bubble in my humble opinion. I laid out the bearish case for the company in a previous article, and for a period of time, shares traded off over 15% from the bubbly levels they had previously seen. After what can only be described as a bizarre almost 20% move higher in one day, on news that the company and insiders were selling shares, the stock now sits in absolute nosebleed territory. Riddle me this. Generally, the law of supply and demand works in a way that the lower the supply of something, the greater the demand. That same analogy can often be applied to stocks, especially companies that have a relatively small float of shares available for trading. You often hear about concern that when lock-up periods expire after IPOs that stock prices will fall as executives and officers are allowed to sell their holdings and thus increasing the amount of available shares for trading and the corresponding supply. In the case of Shutterstock, somehow the news last week that the actual dilution for existing shareholders from the company selling 1M shares of stock and the company founders also selling another 3.6M shares of stock, was enough to send Shutterstock rocketing higher. I have no explanation, not even an inkling, of why an increase in the existing float of shares available for trading by almost 50% would be a reason to send shares soaring. Trading at almost 70x the consensus forward EPS analyst expectations, Shutterstock is a great short opportunity and the recent trading dysfunction should not last.
Is There A Logical Explanation For The Rocket Higher?
The company is not hurting for cash, with its recent IPO still in the rear-view mirror, and has no need to raise almost $60M of additional funds. The insiders who sold 3.6M shares at what was previously just about an all-time high for the stock look extremely savvy. Unfortunately, the rest of the common stockholders, the same issues remain for this company. The business was started by one man taking pictures with his personal camera? The company touts a disruptive business model, and I will give them that point, in so much as that they will force the competition to react to the crowd sourced image licensing concept. In the same vein, the extreme lack of barriers to entry still exist, and the recent results show that growth is already beginning to slow.
News Flash - The Revenue Growth Is Expected To Slow Materially
When the company reported its Q2 2013 earnings, it offered a modest increase to its full-year outlook for both revenue and EBITDA. As is often the case with growth stocks, the market offered up a rather blah response as companies like this need to beat and raise significantly in order to support such an outsized valuation:
It is not until you get to the week of September 16th when you see the bolt higher as existing shareholders celebrate seeing their existing positions diluted (sarcasm intended).
The company was very proud to highlight that its Q2 2013 revenue increased by almost 40% on a YoY basis. What it did not point out, in big bright colors, was what its guidance for the balance of FY 2013 said about its expected revenue growth. The company offered revenue guidance for the year, with the high end of the range coming in at $229M. The table below shows historical revenue that will be used to show the slowing growth rate that the company is forecasting:
During the second half of FY 2012, the company generated $91.4M of revenue. Using the guidance of $229M for FY 2013, and the $107.9M of revenue generated during the first half of the year, the implied guidance for the second half of FY 2013 is for $121.1M of revenue. The company is forecasting revenue growth to slow from the 40% YoY level seen in Q2 2013 to only 32% for the second half of 2013. While 32% is nothing to scoff at, it is a material slow down nonetheless. This fact becomes even more glaring when you consider that the company is guiding for adjusted EBITDA of $48-50M for FY 2013. With a current market capitalization of ~$2.4B, Shutterstock trades for over ~48 times its current year expectations for adjusted EBITDA.
So Why Are Investors Excited?
The only investors who should be excited are those who view this as an overvalued stock, with very little barrier to entry, whose addressable market is nowhere near the size of other nosebleed valuation companies that operate in multi-billion addressable markets. Shutterstock has a very good chance of being a victim of its own success. The company has proven that the crowd sourced model of image licensing is a viable alternative to traditional stock photo licensing. The problem is that any competitor with a web hosting service, cloud servers, and the ability to pay users more for their images and offer those images to customers at a cheaper price can tremendously disrupt the disrupter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.