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Shutterfly Shares: What Is Wall Street Missing?


Leading online photo company Shutterfly (SFLY) had a strong bounce on Thursday rising 8% to $30.98 a share after Barclays Capital reiterated its "overweight" rating on the stock. This after Jefferies Group downgraded SFLY to "hold" and cut its price target to $29.00 a share at the start of the week. So why the disparity, and does Shutterfly deserve another look as a long-term investment?

"We do all of it," the company's CEO Jeff Housenbold tells Breakout. "We're the only site that offers free, unlimited, non-compressed, non-down sampled storage, 100% satisfaction and happiness guarantee, we allow you to edit your pictures, create share sites, but we also allow you to create products from that. And we make all of our revenue today from selling products, approaching $600 million [this year]."

Housenbold says versatility, vertical integration and acquisitions, has enabled the company to grow to 50% market share since its inception in 1999. In addition to direct competitors like Hewlett-Packard's (HPQ) Snapfish, Shutterfly also goes up against the photo divisions within Wal-Mart (WMT) and Walgreen (WAG), and even views Apple (AAPL) as a competitor. He explains they're competing with these giants from a design forward and quality standpoint.

Perhaps the largest splash in the company's 13-year existence came earlier this year when they emerged as the sole bidder for Eastman Kodak's online component, Kodak Gallery. Kodak, which filed for bankruptcy in January, sold the unit for $23.8 million.

"Kodak Gallery was competing with us; a very similar service, but they were unable to may a profit from it," says Housenbold. "Our consolidation of Kodak is part and parcel of us continuing to consolidate the industry."

Kodak Gallery went dark in early July. Since then, Shutterfly has been integrating their 70 million online customers into the existing operation by migrating all 5 billion of their photos. That's no small task considering it's a 50% increase in photos added to storage.

"The integration is going very well, we're ahead of schedule on the migration," says Housenbold. Shutterfly's 15 billion photos are stored on the Cloud. The company is building out their own cloud space that Housenbold says is so cost-effective that he intends to keep the storage service free and unlimited for customers.

Shutterfly has clearly proven its staying power in an industry that has seen numerous busts. On top of that, from a valuation standpoint, it's cheap.

"What is Wall Street missing?" questions Breakout's Jeff Macke, pointing out the company's $1.2 billion market cap and a share price trading at roughly seven-times cash. "They don't get it, the stock is [trading] all over the map."

Despite Thursday's pop, the stock performance was under pressure last year and is off 40% from one year ago.

"As the photo sharing and photo taking markets have continued to explode, Shutterfly continues to get stronger," says Housenbold. "We're the only company that is profitably monetizing photos to the tune of almost $600 million this year, Wall Street has us spitting off over $100 million in EBITDA, we have cash on the balance sheet, we have no debt, and we have continue to have customers who come back and trust us with their precious memories."