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I called in early April Shutterstock Company (New York Stock Exchange: SSTK) A company caught in an active debate about artificial intelligence, but a recent and very large acquisition warrants an update to a cautious, but neutral, stance.
after Not eventful First Quarter, Shutterstock has announced another major acquisition, at a fair multiple given its own valuation. While the company claims this allows it to see more growth and become a stronger business, I still fear the impact of AI on the business model, even though it offers near-term opportunities as well.
Pay for content
Essentially a massive library of photo and video content, Shutterstock is a company that went public in 2012, during a time period when paying for intellectual property wasn’t as common as it is today. The company uploaded about 20 million images per At the time, with sales of about $120 million from this database, the company was hugely profitable.
This allowed the company to go public at $22 per share, where a big tide followed, with shares hitting $100 in 2014, with shares falling into the 30s again in 2016, when that was a $50 stock price before the pandemic.
Meanwhile, the company’s sales increased five-fold to about $600 million, but the company reported operating profits of just $20 million, with margin under significant pressure since going public. During the pandemic, the company enjoyed a real boom, because this trend, combined with the concurrent change in subscription-based models, made it difficult to separate the effects of both changes on the business.
The real change came in 2021, a year in which revenues rose another 16% to $773 million, operating profits reached $108 million, with strong margins again, pushing shares above the $100 mark again. Revenue surpassed the $800 million mark in 2022, with adjusted earnings reported near $4 per share, although I peg real-world earnings (after regressing stock-based compensation expense) at around $3 per share.
The company has guided 2023 sales to rise just 2% while seeing adjusted earnings hold at around $4 per share, as shares fell to the $50 mark in the summer of last year. This led to cheaper valuations, as the company made an interesting purchase of GIPHY from Meta Platforms (META) And at a cheap price, but the advent of AI has cast doubt and real controversy around the future of business (the model) as well.
Ultimately, the company’s 2023 sales increased 6% to $875 million, with operating profit (GAAP) falling to $68 million. While the company reported adjusted earnings of $4.35 per share, it excluded a stock-based compensation charge of $1.30 before tax. While trading in the 1940s, multiples were not required, as the company maintained net cash of $70 million on its balance sheet. In fact, real growth concerns, driven by the rise of artificial intelligence, were seen in 2024 guidance, which called for sales to hold steady at $875 million, with adjusted earnings falling slightly to $4.15-$4.30 per share.
All this made me conclude that this was a battlefield stock. A huge content library could make a company a beneficiary of the AI revolution, but the company was among those that lost the most from that same revolution as well, as its content was no longer needed if images and videos could suddenly be created. After pulling back on net cash holdings, shares traded at about 15 times earnings, while net cash was largely exhausted, and I wasn’t automatically impressed given the disappointing guidance.
Go down further
Since early April, Shutterstock shares have been trading at around $40, after falling to that level in early May when the company reported first-quarter results. Quarterly sales fell by half a percent to $214 million, with GAAP operating profit down about sixty percent to $16 million and change.
GAAP earnings were reported at $16 million, which equates to $0.45 per share, with adjusted earnings down just sixteen cents to $1.13 per share. GAAP earnings declined significantly, particularly on the back of Giphy’s retention compensation expense, which was subsequently adjusted. However, I am not willing to adjust for pre-tax stock compensation expense of $11 million, which equates to about $0.30 per share.
With 36 million shares trading around the $40 mark, the stock valuation fell to $1.44 billion, valuing the business at $1.40 billion if taking into account net cash holdings of $42 million. The company raised its full-year guidance, calling for sales growth of 5.5-7.0% to $923-936 million, with adjusted earnings now seen at the midpoint of $4.25 per share.
The spike in sales guidance is not due to business momentum, but rather to another large acquisition. Along with the first-quarter earnings release, the company announced the acquisition of Envato Pty Ltd., a maker of digital creative assets and templates, known for its flagship Elements product.
The Australia-based company will grow Shutterstock’s presence among freelancers and hobbyists, doubling its subscriber base to more than one million. The deal comes at a hefty price tag, $245 million to be exact, which equates to about 18% of the company’s current valuation.
This seems fair, as management claimed the deal would add about 20% to annual sales and 15% to annual EBITDA. Net debt is expected to be around $200 million, but the initial leverage ratio should be modest, around 0.7 times.
The deal presentation revealed that it has been paid a 1.4x sales multiple and EBITDA multiple, which is broadly in line with its already own valuation, with the deal expected to close in the third quarter.
What now?
The truth is that the situation is still the same as I thought it was in April. The company made a big deal, taking on modest leverage along the way.
The problem is that I’m still not convinced that AI offers an opportunity, although an interesting piece of news pointed out that Shutterstock has already generated significant AI revenue in the past year, while management seems really optimistic about the prospects for conference calls as well. In fact, such reports may have the potential for the company to become a driving force, or even a meme stock, associated with AI over time.
Amidst all of this, I think Shutterstock, Inc. stock is… It looks cheap and may turn out to be very cheap, yet I still fail to get convinced. I think AI has real potential to generate interest and hype in the stock for sure, warranting a small speculative position and/or through long put options, but I don’t have real conviction in the long-term promise and potential of the business’s vision. ,Artificial intelligence as a long-term dilemma.
Given this, a speculative position with long-term bullish calls looks like a good bet, but I don’t see the appeal for Shutterstock, Inc. stock, which holds a fundamental buy position here.
