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Shutterstock, Inc. (NYSE:SSTK) could be oversold at this point with the potential for upside. However, I take the view that revenue growth will need to significantly increase in 2022 to justify further upside.
In a previous article back in February, I made the argument that Shutterstock could see longer-term upside going forward on the basis of strong revenue growth and a healthy cash position. Shutterstock is one of the leading providers of royalty-free and licensed stock photography.
However, the stock has seen a decline over the past couple of months:
The purpose of this article is to investigate whether the decline has been due to broader market sentiment and whether the stock could see a rebound in upside from here – particularly in light of recent financial results.
With Shutterstock having released Q1 2022 financial information on 25th April, it is notable that while Shutterstock’s net earnings saw an increase from the previous quarter, this was primarily due to a reduction in operating costs. Revenue itself came in lower, across both the e-commerce and enterprise segments:
Shutterstock: 2022 First Quarter Financial Information
From a longer-term standpoint, we can see that while net income in Q1 2022 is almost 6 times as large as that in Q4 2019, revenue growth over this period has come in at just under 20%. Therefore, while containing operating expenses has bolstered net income growth – investors will increasingly look for revenue growth to sustain this over the longer term.
In terms of the company’s balance sheet, we can see that Shutterstock saw a drop in cash and cash equivalents of nearly 18% from the previous quarter.
Shutterstock: 2022 First Quarter Financial Information
More broadly, the cash to total liabilities ratio has seen a significant drop from previous levels in the past three quarters:
Figures sourced from Shutterstock 2022 First Quarter Financial Information. Cash to total current liabilities calculated by author.
This indicates that Shutterstock has relatively less cash on hand to meet short-term debt obligations, and a continuation of this trend would likely be of concern to investors.
From looking at the income statement and balance sheet, we can see that while net income may be higher overall – revenue growth itself has been lagging and relative cash levels to meet current liabilities have been lower than in previous quarters.
When looking at the company’s potential valuation in terms of EV to EBITDA, we can see that while earnings per share (before interest, taxes and depreciation) are trailing near a five-year high, EV to EBITDA has decreased significantly since the end of 2021.
In this regard, there may be potential for upside from current levels if further earnings growth continues. However, I take the view that investors will increasingly look at revenue growth to determine whether further upside exists in the stock – cutting operating costs can only achieve so much in terms of sustainable, long-term earnings growth.
As regards the potential performance of Shutterstock into the future, demand for high-quality photos has invariably increased as a result of the growth of e-commerce. However, competition in the space has also been increasing. For instance, stock photo providers such as Pixabay provide numerous photo images for both non-commercial and commercial use without charge.
While Shutterstock is still proving popular with users who want to ensure a premium service, we could increasingly see a situation whereby paid providers start competing on price to attract more customers. As the barriers to entry across the stock photography business are not particularly high, this has resulted in significant competition within the industry.
With that being said, Shutterstock is a major player which has continued to acquire smaller rivals such as PicMonkey – a major creative design platform which complements Shutterstocks’ existing offerings by allowing customers to avail of image and video design tools.
We are also seeing major competitors such as Getty Images (which is expected to go public under the symbol “GETY”) also acquire smaller rivals such as Unsplash – a major website providing stock photography. I expect that this trend could continue going forward – larger companies including Shutterstock will increasingly buy up smaller rivals in an effort to maintain market dominance.
However, such acquisitions are expected to significantly increase the company’s cost base – and investors will be looking to see if such acquisitions add to revenue growth going forward.
To conclude, Shutterstock remains a key player in the provision of stock media, as well as having recently enhanced its services through the addition of image and video design capabilities. The stock could be oversold at this point, but I take the view that revenue will need to show clear signs for the remainder of 2022 if Shutterstock is to see significant further upside.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Additional disclosure: This article is written on an “as is” basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in this article.