Why is Shutterfly Shuddering?

Includes: HPQ, KODK, SFLY
by: Eric Savitz

Well, something appears to be going on with Shutterfly (NASDAQ:SFLY), and it can’t possibly be good.

Shares of the online photo service are getting pummeled today. There’s no news, no analyst moves…just a whole lot of selling. The stock is down $4.14, or 16.1%, at $21.56. Volume is 2.1 million shares, which makes it the third heaviest trading day since the company went public in 2006; if you take out the first day of trading, it is SFLY’s second heaviest volume day ever.

I have called the company for comment, and await a response.

One market source suggests the drop might be related to pricing pressure in the online photo printing segment. Last week, Hewlett-Packard’s (NYSE:HPQ) Snapfish unit announced that it had reduced its price for 4×6 inch prints to 9 cents from 12 cents. (Or 8 cents for pre-paid plans.) That compares to 19 cents, or 12 cents pre-paid, or Shutterfly, and 15 cents for Kodak (EK) Gallery.

The volume today represents close to 18% of the float in SFLY shares, and about 8% of total shares outstanding.

Any other theories?

UPDATE: About a minute after I posted this, I received a research note from Cantor Fitzgerald analyst Derek Brown, who asserted that “concern is high” that the Snapfish price cut will trigger a price war. He contends that Shutterfly is not likely to respond with a big price cut of its own, since it positions itself as the premium brand in the category. He does say that if Shutterfly were to significantly cut prices for prints, it could hit 2008 EPS by 5-8 cents a share. He maintains his Buy rating and $41 target, and suggests using the sell-off today as a buying opportunity.

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