Shutterstock: Enterprise Growth Is Gone
Summary
- Shutterstock reported an OK Q3, but revenue growth in its enterprise segment continues to struggle.
- Enterprise was once a source of torrid revenue growth.
- CEO John Oringer couldn't explain why rival Adobe Stock saw recent 30% revenue growth vs. Shutterstock's 5% revenue growth.
- The company continued to add to its cash pile.
- Despite the cash pile, Shutterstock has growth problems that may continue.
Thesis
Revenue growth concerns for Shutterstock (NYSE:SSTK) leveled off in Q3-19. Overall revenue growth was up 5%, but enterprise sales - once a source of strong growth for the company - were flat.
Rival Adobe (ADBE), which launched its competing stock photo business, Adobe Stock, in 2015, saw its revenue grow 30% recently. Shutterstock's CEO couldn't explain why Adobe's revenue growth was higher than Shutterstock's, maintaining that Shutterstock still has a competitive advantage in the market.
The company is maintaining full-year revenue growth guidance of 3-7 percent, which is dramatically lower than what the company expected when the year began. Though the company is sitting on a sizable cash pile, this is one of the lone bright spots, and it appears Shutterstock may be losing share to Adobe. Shutterstock does not look like a promising investment.
Q3-19: Revenue Growth Levels Off, But Costs Rise
Revenue growth in Q3 was 5%. The company's e-commerce segment - sales to individuals - was up 8%. But the enterprise segment - sales to business - saw flat revenue growth.
The enterprise sales drop-off continues to be a problem. The company is ramping up sales efforts to reverse the shifting tide in enterprise. One of the bright spots in recent years was Shutterstock's enterprise business. A year ago, enterprise sales growth was through the roof. Enterprise sales growth had consistently hit quarterly growth rates in 2017 and 2018 that exceeded 30%. But those torrid enterprise growth rates are gone.
Between 2011 and 2015, Shutterstock, overall, had an impressive revenue growth rate that fluctuated between 36% and 45%. Growth began to rapidly decelerate in 2015 and had leveled off to a 12% growth rate in 2017 and 2018. When 2019 began, the company had expected full-year revenue growth of at least 10%. But the company guided that number down dramatically last quarter to 3-7% last quarter. As of Q3, the company still believes it can deliver 3-7% revenue growth.
| Year | Shutterstock Revenue Growth Rate Deceleration |
| 2015 | 30% |
| 2016 | 16% |
| 2017 | 15% |
| 2018 | 14.7% |
| 2019 Original Expectation At Beginning of Year | 10-12% |
| 2019 Revised Expectation Halfway Through Year | 3-7% |
Additionally, the cost of doing business continues to rise. Operating margins and net profit took a big hit in Q3. And full-year operating margins will be lower than 2018 as sales and marketing costs rise.
Adobe Stock Is Growing
Shutterstock is a market leader in online royalty-free stock photos that are available for purchase by news organizations, advertisers, marketers, etc.
However, the company faces stiff competition, notably from Adobe, which entered the market in 2015 via acquisition of a company called Fotolia. Adobe's entrance into the market was probably inevitable. Adobe is the dominant player in graphic design, video production, and publishing software.
As Adobe stated in 2015, 85% of stock content users were users of Adobe software. And 90% of stock image photos in existence at the time were created with Adobe tools. News of Adobe's 2014 Fotolia acquisition sent Shutterstock tumbling. In the years since, Shutterstock's revenue growth has contracted sharply, from 39% in 2014 to 3-7% this year.
Adobe Stock entered the market in 2015 with 40 million stock images vs. Shutterstock's library of 53 million and 2.5 million videos. Though both companies have grown their content libraries markedly since 2015, Adobe Stock has a reputation of procuring and reselling higher quality content than Shutterstock.
In prior articles, I suggested it was hard to believe Adobe wouldn't gain a lot of traction in the market. Adobe is a leader in creativity software and its inclusion of stock photos and videos into its portfolio made sense. Adobe ($142B) is also much larger than Shutterstock ($1.5B) and has the resources to develop a solution over time that could dwarf Shutterstock on overall quality, content volume, and value.
In its Q3-19 report, Adobe CFO John Murphy noted that Adobe Stock revenue in Q3 had grown 30%. Shutterstock CEO Jon Oringer was asked about the Adobe growth rate on the call by an analyst. Oringer said he didn't know how to explain why Adobe was growing revenue at 30% while Shutterstock was struggling to grow.
On Adobe, specifically I really, I mean, I can't comment. And we've talked about this before. I've talked to all of our analysts about this over the past couple of quarters. Look, I have no idea how they account for where that 30% growth comes from, I think you'd have to ask them, but what I can tell you is this, as far as the competitive environment, we believe we're the best positioned company in our space to take advantage of the opportunity in front of us. - Shutterstock CEO Jon Oringer, Q3-19 call.
If we're playing the long game, it's hard to imagine a scenario where Adobe does not become a more dominant player in the stock photo/video market. However, Oringer insists Shutterstock has the competitive advantage. It has a library of photo and video content that has always been larger than Adobe Stock's, and the company is growing out that library aggressively quarter after quarter. In Q3, Shutterstock's image library expanded by 34% to approximately 297 million images and the video library increased by 33% to approximately 16 million clips. I don't see current numbers for Adobe Stock's photo/video library size. Adobe executives sometimes mention those stats on Adobe earnings calls, but not in recent quarters.
Valuation
Despite the concerns laid out above, one could make the case Shutterstock is undervalued on a free cash flow basis. The company is a strong generator of free cash flow, and the $1.5 billion company is sitting on nearly $300 million in cash. However, with revenue growth faltering, the company's growth days are likely over.
Conclusion
Shutterstock and Adobe Stock may remain the top two photo stock providers for the foreseeable future, but Adobe as a company looks like a better overall investment. Adobe continues to grow revenue in excess of 20% a year while Shutterstock's strong revenue growth days are likely over.
This article was written by
Disclosure: I/we 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.
Additional disclosure: I am long ADBE.