Shutterstock (SSTK) engages in the operation of a marketplace for licensed content. The firm licenses images, video, music, editorial assets, and custom content tailored to a brand’s needs.
It operates through the Content Business and Other Category segments. The Content segment consists of Bigstock, Music, and Editorial. The Other Category segment operates webDAM.
Shutterstock recently reported earnings for the first quarter of 2022. The company saw revenue slightly miss by $2.88 million, which we consider to essentially be in line. On the bright side, earnings per share beat by $0.15. In total, revenue was $199.13 million while EPS was $1.00.
However, in the current market environment, the most important thing that investors are looking for is guidance. Luckily for investors, the company reaffirmed its previous guidance, calling for revenue of $835 million to $850 million and adjusted EPS of $3.65 to $3.80.
The revenue guidance equates to an increase of 9% at the midpoint, while the EPS guidance is higher than the consensus estimate of $3.46. Nevertheless, despite the relatively positive report, we are neutral on the stock.
Growth Catalysts
Shutterstock has a few growth levers it can pull to help it achieve its revenue target. To begin with, the company is targeting small-to-medium-sized businesses through its FLEX 25 offering, which is a subscription-based service that allows users to use a mix of pictures, sounds, and videos.
Customers seem to be finding this service useful, as the company’s subscriber count grew 17% year-over-year, which equated to subscription revenue growth of 12% year-over-year. As a result, subscriptions now make up 43% of total revenue, the highest it has ever been.
Businesses love subscription revenue because it is recurring, which allows for more predictability and better customer retention. Furthermore, subscription revenue tends to be higher-margin revenue, evidenced by the fact that management attributed higher adjusted gross margins to a higher percentage of subscriptions.
Moreover, innovation will also play a key role in the company’s growth. Shutterstock has made acquisitions that allow customers to use predictive artificial intelligence to help them identify which content will perform best for their specific goals.
Thus, with a larger mix of recurring revenue and product improvements, it appears likely that Shutterstock will be able to achieve its growth targets.
Increasing Customer Engagement
As a software-as-a-service company, the only way customers engage with the company is by visiting its website in order to use the content library. As a result, we can gauge how well the company is doing by looking at its website traffic.
As we can see from the picture above, engagement on the website has been trending up since December 2020. Although total visits dropped briefly in February, they quickly rebounded in March.
Going forward, investors can use this data to potentially anticipate any deterioration of the underlying business before the company reports earnings. Although the correlation might not be perfect, it could be a reasonable proxy that helps identify red flags.
Dividends
When it comes to dividends, the company pays out a small annualized dividend of 1.23%. Although nothing exciting, it is higher than the sector average of 0.73%.
However, a couple of things are worth mentioning. First off, excluding the one-time dividend it paid back in 2018, the company only started paying a consistent dividend in 2020. Secondly, it only has a payout ratio of approximately 25%.
This means that there is plenty of time and room for the dividend to grow going forward. However, for dividend-focused investors who need good yields today, there are far better options than Shutterstock.
Valuation
To value Shutterstock, we will use the H-Model, which is similar to a three-stage DCF model. The H-Model assumes that growth will decelerate linearly over a specified period of time. We believe this is a reasonable assumption as companies gradually slow down as they mature.
Stock Value = (CF(1+tg))/(r-tg) + (CFH(hg-tg))/(r-tg)
Where:
- CF = cash flow per share
- tg = terminal growth rate
- hg = high growth rate
- r = discount rate
- H = half-life of the forecast period
For Shutterstock, we used the following assumptions:
- CF = $2.8 per share
- tg = 2.869% (using the 30-year U.S. Treasury yield)
- hg = 16.7% (based on analysts’ estimates)
- r = 7.6%
- H = five years (we are assuming it will take 10 years to reach terminal growth)
As a result, we estimate that the fair value of Shutterstock is approximately $101.81 under current market conditions. With a current price near $77, it’s safe to say that SSTK is most likely undervalued.
Wall Street’s Take
Turning to Wall Street, Shutterstock has a Strong Buy consensus rating based on three Buys, zero Holds, and zero Sells assigned in the past three months. The average Shutterstock price target of $106 implies 37.2% upside potential.
Final Thoughts
Shutterstock is not a high-growth company since its revenues are only expected to grow 9% at the midpoint. However, the company is in the process of transitioning more users towards subscriptions, which should help boost margins going forward.
Furthermore, it appears that the company is undervalued under current market conditions, with analysts thinking the same thing.
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