Shutterstock (NYSE:SSTK) has seen continued signs of life. Early February of this year, I concluded that the company was no longer stuck and that was quite an understatement, with shares up another 80% ever since. This move comes on the back of increasing sales growth, M&A and real bottom-line leverage, but perhaps the stock has moved up a bit too much here, at least too much to create appeal.
Shutterstock went public in 2012 as the stock rose to $22 per share on the first day of trading, at a time when paying for intellectual property was not as common as it is today.
The company held a database of nearly 20 million images at the time, uploaded by tens of thousands of contributors, used and paid for by more than half a million users, and on average being downloaded some 3 times each year. With a valuation of just over half a billion, the resulting 4 times sales multiple looked reasonable as the company was very profitable, with earnings of $22 million being reported on $120 million in sales.
After the initial offering, shares did see almost excessive momentum as they rose to $100 in 2014, to collapse to $30 in 2016, and ever since largely having been trading in a wide range around the $50 mark, and actually at $65 early in 2021.
Between the IPO and now revenues grew from $235 million to $650 million in 2019, yet net earnings of $26 million in 2013 had actually fallen to $20 million, and those are operating earnings in 2019. This long term margin pressure was a concern and that was the problem with the stock. Net cash of $300 million resulted in a net cash position of $8 per share, as realistic earnings ran at less than a dollar per share, translating into sky-high earnings multiples.
The pandemic initially did hardly impact the business with revenues down 1 and 2%, respectively, in the first two quarters of 2020. However, marketing and sales efforts were cut in a big way, actually resulting in a boost to earnings. Third quarter sales rose 4%, and based on the improved margins, I pegged realistic earnings at $2.50 per share in 2020 earlier this year when the fourth quarter results were not yet reported.
The strength of the balance sheet and some growth resulted in the situation starting to look a bit more compelling. That and a nice tuck-on acquisition made me to look to initiate around the $60 mark, but unfortunately those levels were not seen anymore.
Just two weeks after my cautious upbeat take, shares jumped to nearly $90 overnight, and the company ended 2020 with 9% revenue growth in the final quarter. Moreover, net earnings of $26 million were reported, for an annual net profit of $72 million on $666 million in sales, as real growth is accompanied by more impressive margin expansion. With earnings reported at $2.00 per share, or $2.80 per share on the run rate base of the fourth quarter results, the momentum was clearly here.
Moreover, the company guided for 7% sales growth to $715 million in sales and adjusted earnings between $2.75 and $2.90 per share, albeit that adjusted earnings in 2020 already totaled $2.62 per share.
Part of the success comes as the company is moving from a pay-per-use to a subscription-based model which actually was well received by customers, and it is more profitable for the company and more valuable for investors as well. After a strong first quarter of this year the company hiked the full year sales guidance by ten million and earnings guidance by three cents.
In July the company announced the purchase of three smaller AI platforms in a $35 million combined deal. The sales guidance was hiked by another $20 million to $745 million, albeit a two penny increase in the earnings guidance was relatively modest. By now shares have risen to $100 per share as the over $400 million net cash component was equal to around $10 per share as well, as investors were betting on further momentum.
In fact, shares now trade at $114 which gives the company a $4.2 billion equity valuation, or $3.8 billion net of cash. More dealmaking is in the works, as in September, the company announced the $110 million purchase of PicMonkey, equal to 3% of its own valuation.
PicMonkey is an online graphic design and image editing platform, used for logos, presentations and the like. The comment that the deal is set to add roughly 3% to overall sales suggests a $20-$25 million revenue contribution, indicating that the business is acquired at roughly 4-5 times sales, largely in line with its own valuation. Accretion to earnings suggests that the business is profitable, and the wider range of offering looks quite appealing, I must say.
Shutterstock has really come to live after a few harsh years. Revenue growth now surpasses 10%, with deferred revenue balances suggesting 2% greater growth than the reported sales numbers here. Trading at $113, valuations of the operating assets surpass $100 per share given the net cash holdings which are seen around $8, even after the latest deal.
That valuation implies that based on the adjusted earnings outlook, shares trade around 33 times earnings, but these are adjusted, as GAAP earnings likely come in around 40-50 times earnings. The adjustment in this case is needed and is very real, as stock-based compensation expenses are really dilutive to investors of course. Hence, I kick myself for missing out on a 70-80% rally over the pretty much the past half a year, as most of the appeal seems gone.
Nonetheless, Shutterstock is a very interesting name to watch as the company has delivered on real margin gains after a few sleepy years, but moreover combines this with increasing revenue growth and a savvier and more predictable subscription business model.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.