Shutterstock: Market Leadership Won’t Justify High Valuation (NYSE:SSTK)

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Shutterstock Rings The New York Stock Exchange Opening Bell

D Dipasupil/Getty Images Entertainment

In this analysis, we analyzed Shutterstock’s (NYSE:SSTK) market leadership in the stock images providers market and determined whether it has a competitive advantage based on the size of its image collection and the value to forecast its revenue growth going forward. Moreover, we examined its profitability in terms of its gross and net margins and its SG&A costs to forecast its profit margins. Lastly, we looked into its cash flows and its capex requirements to forecast its FCF margins. We find that despite the company having a unique market leadership, it does not command a higher stock valuation than what it is currently trading at.

Market Leader But Facing Greater Competition

Based on Coherent Market Insights, the Stock Photography market was valued at $3.3 billion which translates to a market share of 20% for Shutterstock. According to Datanyze, the company has the highest number of domains using it compared with iStock, Unsplash, Adobe (ADBE) Stock, Think Stock, and others with a total number of 347,819 domains.

stock image providers share

Datanyze, Khaveen Investments

Shutterstock has a huge collection of image libraries at approximately 400 million. In the past 5 years, the company has been continuously expanding its image library by an average of 29%. We believe the number of image collections is important mainly because it could benefit customers by providing more options to choose from. Also, its contributors have increased to 2 million with an average growth rate of 71% in the past 5 years which highlights the strength of the company to attract contributors to expand its image collection.

Shutterstock Images and Contributors

2016

2017

2018

2019

2020

2021

Shutterstock Images (‘mln’)

116

170

242

314

360

400

Growth %

47%

42%

30%

15%

11%

Shutterstock Contributors (‘mln’)

0.19

0.35

0.65

1.1

1.6

2

Growth %

84%

86%

69%

45%

71%

Source: Shutterstock, Khaveen Investments

While Shutterstock’s image library was still increasing, the growth rate was decreasing from 47% in 2017 to 15% in 2020. Compared with its approved contributors’ growth, we could see a similar trend with the growth of the image library.

To find out the competitive advantage of Shutterstock, we have compared its subscribers, the number of images and subscription pricing based on the subscription plan with 750 monthly download limits with iStock, Adobe Stock and StockPhoto. Shutterstock has the highest number of subscribers and images in its library compared with the other three companies. Aside from Adobe Stock, the subscription pricing of Shutterstock appeared to be the highest among its competitors at $0.27 per image. Shutterstock has the lowest price per image from its total number of images available at $0.50 per image among its competitors. Customers would have access to the extensive number of images from Shutterstock with its subscription plans.

Stock Images Subscribers (2021)

Subscribers

Number of Images (‘mln’) (‘a’)

Subscription Pricing ($ monthly) (‘b’)

Subscription pricing ($) per image (750 monthly download limit)

Subscription pricing ($) / Total Number of Images (‘c’)

Shutterstock

347,819

400

199

0.27

0.50

iStock

93,325

88

165

0.22

1.88

Adobe Stock

22,731

60

262.5

0.35

4.38

StockPhoto

7

157.5

0.21

22.5

*c = b / a

Source: Shutterstock, iStock, Adobe Stock, StockPhoto, Khaveen Investments

Until 2020, its revenue growth had decelerated from 16.28% to 2.49% before recovering in 2021. Based on the table below of the free stock photo providers, we believe Shutterstock could face further challenges in the future due to new market entrants with free alternatives.

Free Business Stock Photos Providers

Year founded

Vecteezy

2007

Gratisography

2011

Morguefile

1996

Pixabay

2010

Stockvault

2004

Pexels

2014

Picjumbo

2013

Rawpixel

2015

Reshot

2018

Source: Foleon, Khaveen Investments

Overall, while Shutterstock is the market leader with the largest image library, we believe its growth outlook could face competitive headwinds from free alternatives. That said, we believe its strength among paid stock image providers is its value with the lowest pricing per image. However, given its decelerating image collection growth, this could reduce its competitive advantage against competitors. We projected its revenue growth conservatively based on its 5-year historical growth for its E-commerce and Enterprise segments but tapering down by 1% as a conservative estimate.

Revenue Projections ($ mln)

2017

2018

2019

2020

2021

2022F

2023F

2024F

2025F

2026F

E-commerce

332.38

365.73

392.24

412.52

490.21

534.83

578.16

619.22

657.00

690.52

Growth %

4.22%

10.04%

7.25%

5.17%

18.83%

9.10%

8.10%

7.10%

6.10%

5.10%

Enterprise

208.71

254.81

258.28

254.17

283.20

317.33

352.39

387.80

422.90

456.94

Growth %

26.97%

22.09%

1.36%

-1.59%

11.42%

12.05%

11.05%

10.05%

9.05%

8.05%

Total

557.11

623.25

650.52

666.69

773.42

852.16

930.55

1,007

1,080

1,147

Total Growth %

12.70%

11.87%

4.38%

2.48%

16.01%

10.18%

9.20%

8.22%

7.24%

6.26%

Source: Shutterstock, Khaveen Investments

Solid Profitability But Flattish Outlook on High SG&A Expenses

Shutterstock had an average gross margin and net margin in the past 5 years of 59.6% and 7.5% respectively. Its gross margins had increased over the period driven by its rising gross margins. The company’s cost of revenue includes royalties paid to contributors, credit card processing fees, content review costs and more.

Shutterstock Profit Margins ($ mln)

2013

2014

2015

2016

2017

2018

2019

2020

2021

Revenue

235.50

328.00

425.10

494.30

557.10

623.30

650.50

666.70

773.40

Revenue Growth %

38.86%

39.28%

29.60%

16.28%

12.70%

11.88%

4.36%

2.49%

16.00%

Gross Profit

144.90

197.90

250.60

291.20

324.00

355.60

372.30

408.30

495.80

Gross Margin %

61.53%

60.34%

58.95%

58.91%

58.16%

57.05%

57.23%

61.24%

64.11%

Net Earnings

26.5

22.1

19.6

32.6

16.7

54.7

20.1

71.8

91.9

Net Margin %

11.25%

6.74%

4.61%

6.60%

3.00%

8.78%

3.09%

10.77%

11.88%

Source: Shutterstock, Khaveen Investments

We expect its margins to remain under pressure due to free alternatives. Unsplash, while having a lower volume of choices compared to Shutterstock, provides its license for customers to use the images for free including for commercial purposes. Besides that, Pexels also allows customers to utilize photos and videos for free without giving credit to the photographers, as well as enables modification of photos and videos. We believe these free alternatives could affect Shutterstock’s revenue and margins as users could obtain free access to images and videos.

expense analysis

Shutterstock, Khaveen Investments

Additionally, despite its rising gross margins, the company’s net margins had remained under pressure due to the increasing SG&A expenses based on higher spending on performance marketing initiatives and higher general and administrative including higher employee compensation associated with its improved business performance. Shutterstock has reached the lowest net margin of 3% in 2017 driven by an increase in sales and marketing headcount to support its expansion into new products and markets, as well as increased sales commissions. In 2020, Shutterstock has decreased its SG&A expenses driven by a declined marketing spending of $21.1 mln. In the past 10 years, its SG&A expense as a % of total revenue had increased.

Shutterstock SG&A Expenses

2013

2014

2015

2016

2017

2018

2019

2020

2021

Revenue

236

328

425

494

557

623

651

667

773

Revenue Growth %

38.86%

39.28%

29.60%

16.28%

12.70%

11.88%

4.36%

2.49%

16.00%

SG&A Expenses

80

121

168

196

243

261

292

273

333

SG&A Growth %

30.18%

51.13%

39.55%

16.46%

24.03%

7.40%

11.91%

-6.67%

22.08%

SG&A Expenses in % of Revenue

34%

37%

40%

40%

44%

42%

45%

41%

43%

Source: Shutterstock, Khaveen Investments

With the increased competition, we expect that to have an impact on Shutterstock’s profitability due to high SG&A expenses as % of revenue. While Shutterstock’s profitability has increased in 2021, we expect its profitability to remain weighed down by high SG&A expenses and forecasted a gross and net margin of 62.8% and 10% by 2026.

shutterstock margins

Shutterstock, Khaveen Investments

Positive FCFs With Lean And Scalable Business Model With Low Capex

Shutterstock has a low 10-year average Capex in % of revenue at 9.79% and its FCF Margin had been increasing from -5.81% in 2013 to 19.51% in 2021 but dropped in 2021 due to the acquisition of PicMonkey for $110 mln. In 2013, the company incurred planned capital expenditures related primarily to the purchase of computer servers and networking equipment, as well as capital expenditures related to leasehold improvements for the build-out of its new headquarters office location in New York City. Shutterstock’s Capex in the percentage of revenue has decreased from 2013 at 29.77% to 5.29% in 2020 but increased in 2021 with the acquisition.

Shutterstock Capex ($ mln)

2013

2014

2015

2016

2017

2018

2019

2020

2021

Capex (‘a’)

70

29

72

56

57

13

27

35

250

Revenue (‘b’)

235.5

328

425.1

494.3

557.1

623.3

650.5

666.7

773

Capex / Revenue % (‘c’)

29.77%

8.84%

16.89%

11.41%

10.30%

2.05%

4.18%

5.29%

32.4%

*c = a/b

Source: Shutterstock, Khaveen Investments

Subsequently, Shutterstock continues to invest significantly in product development and hosting infrastructure to enhance its customer experience by deploying new products and features through acquisitions. From 2015 to 2021, Shutterstock had 5 major acquisitions to enhance its product features including music and 3D models.

Company Acquisitions

Year

Acquisition Cost

Function

Premiumbeat

2015

32 mln

Royalty-Free Music

Flashstock

2017

50 mln

Content Creation Platform

Amper Music

2020

AI Music Composition Tools

TurboSquid

2021

74 mln

3D Models

PicMonkey

2021

110 mln

Photo Editor and Graphic Design

Source: Crunchbase, Khaveen Investments

Since 2015, Shutterstock has launched initiatives to provide a more comprehensive creative process solution for its customers through acquisitions, including Premiumbeat and Amper Music which provide royalty-free music service for content creators not limited to videos, films, apps, games and television programming. Besides that, Shutterstock has acquired Flashstock to curate customized content for enterprise marketers and brands for multiple channels. Additionally, Shutterstock has acquired TurboSquid, the world’s largest 3D marketplace with solutions for companies to manage their models and streamline the 3D modelling processes.

In September 2021, Shutterstock has acquired PicMonkey with $110 mln, potentially contributing around 3% to the company’s revenues and increase 200,000 subscribers. PicMonkey integrates with Shutterstock by providing templates, graphics and fonts too small businesses and non-professionals for accessing visual content. Besides that, this acquisition could provide additional design and editing tools, collaboration features and pre-designed templates to customers without prior knowledge and formal training.

Going forward, we expect its cash flows to remain positive with a low capex as a % of revenue without acquisitions and projected its FCF margins to reach 7.65% by 2026.

shutterstock cash flows

Shutterstock, Khaveen Investments

Risk: Market With Low Barrier Of Entry

However, one concern about Shutterstock’s position in the Stock Photography market could be its low barrier to entry. Taking Shutterstock for example, the low 10-year average Capex in % of revenue at 9.4% could provide a better opportunity for the new stock images providers due to the marketplace business model which would not incur physical storage. Additionally, with the limited cost for inventory management, new entrants would not have risks such as product lifecycle, shelf life and loss of inventory.

Besides that, with the low capex requirement, new entrants could easily set up an e-commerce platform with limited access to capital required for research and development.

Valuation

We have used DCF valuation as we expect Shutterstock to have positive free cash flow going forward. For its terminal value, we based it on its 3-year average due to limited comparable companies.

Shutterstock EV/EBITDA

2020

2021

Current

Average

EV/EBITDA

17.47x

23.97x

13.99x

18.48x

Source: GurufFocus, Khaveen Investments

We summarized our revenue projections for the company in the table below based on a 5-year average growth rate for each segment tapered down by 1% per year as a conservative estimate.

Revenue Projections ($ mln)

2022F

2023F

2024F

2025F

2026F

E-commerce

534.83

578.16

619.22

657.00

690.52

Growth %

9.10%

8.10%

7.10%

6.10%

5.10%

Enterprise

317.33

352.39

387.80

422.90

456.94

Growth %

12.05%

11.05%

10.05%

9.05%

8.05%

Total

852.16

930.55

1,007

1,080

1,147

Total Growth %

10.18%

9.20%

8.22%

7.24%

6.26%

Source: Shutterstock, Khaveen Investments

Based on our DCF model with a 9.3% discount rate, there is no upside for its shares.

shutterstock valuation

Khaveen Investments

Verdict

As the market leader among the stock image providers, Shutterstock attracts the highest number of customers with its largest image library source of 300 million among the stock image providers including iStock, Adobe Stock, Unsplash and ThinkStock. The company further extends the other product features for individuals and enterprises through acquisitions covering Music, 3D models and creative processes. However, due to the decreasing revenue growth and the risk of competition in the future, given the low barrier of entry of stock image platforms, we projected its future revenue growth to decelerate from 10.2% in 2022 to 6.3% in 2026. Based on our DCF valuation, we have a Hold recommendation with the target price of $60.73.



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