We are upgrading our rating on Shutterfly Inc. (SFLY), a leading provider of Internet-based social expression and personal publishing service, to Outperform form Neutral.
The rating was upgraded on a host of factors including better-than-expected earnings, seasonality of demand, continued margin expansion, strong demand for photo-book, and strategic partnerships.
Second Quarter Flashback
Shutterfly reported adjusted second quarter 2010 loss of $3.1 million or 12 cents per share versus the net loss of $3.5 million or 14 cents in prior year quarter and the Zacks Consensus Estimate of 30 cents loss per share. The results came in better than the guidance range of 21 to 18 cents loss per share.
In the quarter, net revenue was up 20% from the prior-year quarter at $46.8 million, surpassing the Zacks Consensus Estimate of $45 million and the management guidance range of $43.5 million to $45.5 million. The rise was primarily driven by increased revenues from personalized products and services.
Seasonality of Demand
Shutterfly is approaching its fourth quarter, which is seasonally the strongest owing to the holidays and garners highest earnings for the company every year. We believe the company remains well positioned to capitalize on the upcoming holiday season given the increased demand for photo book.
The company witnesses continued margin improvement mainly on the back of labor efficiency, shift to higher-margin personalized products and services and lower material costs. Moreover, Shutterfly will likely experience further upside in margins driven by technology leverage.
Solid Metrics and Successful Partnership
Shutterfly is exhibiting strong growth in metrics as well as transacting customers, order volumes and value of the orders. Additionally, we expect continued growth in social media to be the key catalyst for the company’s growth over the long term. The recent success of Shutterfly’s Facebook application will sustain user growth in the company’s crucial fourth quarter. The company will be able to acquire new customers through the rapid growth of share sites.
Based on the above fundamentals, we expect the stock to fetch above-market returns and upgrade the stock from Neutral to Outperform. Shutterfly currently retains the Zacks #1 Rank, which translates into a short-term Strong-Buy rating.