Friday, January 04, 2008

Shutterfly (NASDAQ:SFLY): Stock defended at two firms; expecting a bounce

We have at least two firms out defending Shutterfly (NASDAQ:SFLY) after its shares were down yesterday by 17% on news that Snapfish, a Shutterfly competitor, lowered its pricing on 4x6 prints from $0.12 to $0.09 or by 25%.

- Piper Jaffray notes that 4x6 print pricing has been stable for the last two years with Shutterfly, Kodak and Snapfish each charging $0.19, $0.15 and $0.12, respectively. Firm notes that Shutterfly has continued to maintain a significant price premium over the last 2 years despite the availability of Kodak and Snapfish' lower price alternatives. They believe sell-off is overdone as: 1) 75-80% of Shutterfly's revenue in a quarter is from existing customers and switching costs are relatively high; 2) They estimate that 4x6 prints comprise less than 25% of revenue and are growing at 20% versus the non-print category growing at approximately 85-95% over the last several quarters.

Given the compelling valuation, PJ's expectation for Q4 outperformance and belief that Shutterfly is unlikely to lower 4x6 prices, the firm maintains Buy rating and $37 price target.

- Oppenheimer maintains Buy and $42 tgt saying 1) Prints account for roughly one-third of revenue while PP&S is two-thirds with higher margins, 2) PP&S is growing at much faster rate (+90% in 3Q) and expected to drive bulk of revenue growth in FY08, and 3) historically, Shutterfly has higher print pricing ($0.19) without sacrificing growth.

Even if SFLY were to cut print pricing by 10%-30% the firm estimates roughly a $10mm-$20mm impact to revenue and $0.05-$0.10 to EPS vs. firm's $252mm and $0.54 for FY08.

Notablecalls: Yesterday's sell-off looks way overdone. In fact, it looks to be orchestrated by shorts as the price-cut took place already on Dec 27.

If history serves as any sort of a guide, SFLY will have to lower their pricing somewhat. It happened in 2005 and will likely happen this yr. Yet, even with Opco's most bearish impact estimate, the sell-off is overdone. I expect to see a bounce.

PS: I hear Amtech is out with a downgrade on the name, taking their rating to Neutral from Buy. That should provide the entry point.

No comments: