Shutterfly: A Rosy "Picture" For Digital Growth?


All of us in California, indeed millions across the country, were gripped by those horrific images of the raging fires in Southern California.

And in the midst of the tragedy, when we had a chance to hear from the victims fleeing their homes, they were usually asked what they grabbed as they were evacuating. Over and over again, we heard the same answer: photographs.

The tragedy though is shining a bright light on the world of external, digital storage and companies like EMC , Seagate and many others. And it's also putting online and digital photography into the center ring, especially as that sector of technology enters into what is typically its hottest quarter: the holiday shopping quarter. And with Shutterfly poised to report its earnings after the bell Tuesday, it gives us an opportunity to take a look at the company.

"Over the last five years we have experienced over 100% compound annual growth rate in terms of revenue and these markets that we are addressing in terms of social expressing, they are enormous," says Jeffrey Housenbold, the company's CEO.

That doesn't mean that Shutterfly's future is as rosy as its past. Quite the contrary: some on the Street wondering just how bright the company's prospects really are. My friend Herb Greenberg wrote last month that company founder Jim Clark (Silicon Graphics, Netscape) recently quit the board, and while he hasn't sold any shares in the company, he did say that what had been a technology company had become much more of a manufacturing company instead.

Not necessarily a bad thing as companies mature. The fact is, big-time tragedies like the one that befell thousands of homeowners in Southern California last week could inspire a new round of interest in digital photography. Why worry about printed photos when the digital originals are stored online? Or why try to scrounge up all your photo albums, when all you have to do is grab an external drive holding tens of thousands of digital images?

We've seen major initiatives recently by the likes of Eastman Kodak , Hewlett-Packard , and Yahoo's Flickr. As we head into the holiday season, we could see even more interest.

As far as Shutterfly is concerned, we had a chance to visit one of the company's plants in Hayward, Calif. where photos are printed, calendars are created, and photo books are bound and shipped. It was a beehive of activity. It's one of two sites the company has up and running 24/7 during the holiday season, churning out product to millions of members.

"We are really excited about the fourth quarter. It's historically been a large quarter for us," says Housenbold. He says that only 6% of the 58 million households with a digital camera and internet connection are using photo publishing sites like his, so the market opportunity remains significant. But some on the Street aren't sold on the concept. At least not yet.

"The problem isn't how much revenue you can make the problem is what kind of profit can you make on that revenue," says Seth Jayson at the Motley Fool.

But Housenbold is undeterred: "We have been competing successfully in this marketplace since we pioneered it in 1999. While many players have offerings in online photo, none of them are singly focused, independent and really care about preserving memories."

Shutterfly has had quite a year: this was a $12 stock a year ago when it went public, and it's up around $35 today. But with a trailing P/E of a staggering 119, a forward P/E of 62, these shares ain't cheap. And investors may have caught on already, too much too soon. Valuation alone could deter ongoing investment in the sector. And competition is steep.

JMP Securities still rates Shutterfly a "strong buy" and expects the company to beat expectations later today, looking for 44% growth on the topline (at the low-end of management's own 44-46% range. Personalized products and services should more than double to nearly $16 million and account for 52% of total revenue.

And the firm remains optimistic that Shutterfly's high growth potential could mean a full-year guidance revision upward, and a possible increase in the firm's 52-week target. With another huge tragedy spotlighting the inherent value of digital photography, and the holiday season upon us, the sector is certainly worth a closer look.

Questions? Comments?