On Oct. 4, as Apple introduced the new iPhone 4S handset, buried in the presentation was an announcement of a new app, dubbed Cards, which allows users to take iPhone photos and turn them into greeting cards. Apple has the cards printed and mailed within the US for $2.99 each, postage included.
Shares of American Greetings and Shutterfly both fell hard on the day the app was introduced.
Since then, the focus on Apple has been more on the hardware, namely the iPhone 4S as well as speculation over a new iPad 3 and new HDTV, while little attention has been paid to the success of Cards. And rightfully so, as the consumer tech gadgets like the iPhone certainly mean more to Apple's top line than some miniscule contribution from a card-making application.
But for investors in American Greetings and Shutterfly, the pain has been real. Since the Cards app officially launched in Apple's App Store on Oct. 13, shares of American Greetings have dropped 27 percent and Shutterfly's stock has been cut in half. By comparison, the broad S&P 500 index is up 4.4 percent since that date and Apple's shares are up 0.6 percent.
While it's hard to say with certainty that Apple's Cards app has been a roaring success, the woes of these two companies hint that Apple is gaining ground in the greeting card and online-photo space. Last week, American Greetings saw its third-quarter profit plunge by 40 percent, missing earnings-per-shares estimates by a wide margin, mostly due to cost increases. Operating margins shrank, a trend that will continue into 2012 as the company said cash flow from operating activities would be lower than it had estimated.
Shutterfly also delivered some crummy news for shareholders in time for the holidays last week, cutting its fourth-quarter revenue and profit outlook. Shutterfly blamed the weaker outlook on competitive pricing pressures, saying rivals were sharply discounting their services during the holiday season.
Analysts, though, have said little recently about Apple's threat to American Greetings or Shutterfly. American Greetings receives scant attention from sell-side analysts, so no one has come to the company's defense. Meanwhile, Shutterfly garners a whopping 11 "buy" ratings from the 13 analysts following the company.
Among those analysts, several brushed off Shutterfly's lowered guidance, saying it was largely expected. On Friday, Jefferies analyst Youssef Squali slashed the firm's price target on Shutterfly to $40 from $65 but still maintained a "buy" rating on the stock, pointing out pricing competition from Hewlett-Packard's Snapfish and American Greetings' Cardstore.com but omitting any mention of Apple.
On Tuesday, Craig-Hallum analyst Mitchell Bartlett dropped his price target on Shutterfly to $32 from $45 but kept his "buy" rating, also noting competition from Snapfish and American Greetings but didn't say anything about competition from Apple. At Morgan Keegan, analyst Justin Patterson also cut his price target to $40 from $55 on Tuesday, but still maintained an "outperform" rating with nary a mention of Apple or the Cards app in his research report.
Barron's, on the other hand, smartly warned investors in Shutterfly (and American Greetings, by extension) earlier this month that Apple and the Cards app was a growing force to be reckoned with.
So whom should investors believe? The choice is between analysts who still say to buy the stocks even as they keep dropping price targets or those who have been warning about Apple's new presence in the online-photo and card space. If competition from other rivals is putting a dent in sales and profits for these companies, it's hard to imagine that environment improving with more iPhone and iPad users after the holidays.
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