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Why Shutterstock Is Set to Soar

- By Robert Stephens, CFA

Online image and video marketplace Shutterstock Inc. (SSTK) could offer investment potential after underperforming the S&P 500 over the last year. The stock has been flat, while the S&P 500 has risen 9%.

An evolving strategy could boost its financial performance. The company is seeking to improve the customer experience through the release of a variety of new products. It is also implementing a refreshed marketing strategy that may improve brand awareness and differentiate its offering from those of competitors.


While the company's recent earnings missed expectations, its growth potential suggests it could deliver a successful recovery relative to the wider index.

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Customer focus

The company has increased its focus on improving the customer experience, which could broaden its differentiation versus industry peers. As part of this initiative, it recently launched an iOS View in Room application, which allows users to virtually position any of Shutterstock's 260 million images against any wall they desire via their smart phone.

An improved contributor experience is also a priority as its in-app registration process is now available in 21 languages, making it easier for users to monetize their content. The recent launch of platform solutions the company's API partners can offer to their customers is also expected to further increase contributor numbers, which were up 88% in the most recent quarter.

Improvements to Shutterstock's technology platform contributed to a 9.3% increase in e-commerce channel revenue in the most recent quarter. Planned enhancements to improve page load speeds, boost the available functionality on mobile devices and offer greater website stability could serve as continued catalysts for e-commerce growth over the medium term.

New products

New products are set to drive customer demand higher, improving the company's competitive advantage. For example, its editorial offering is growing, with 400,000 new images being added per month to the collection. Engagement levels within its editorial segment are expected to increase as it grows, with coverage increased to over 1,500 sporting and entertainment events last quarter.

Premium products such as the Shutterstock Select video offering, which offers royalty-free video content, could boost revenue per customer. In addition, the launch of its first software kit may help developers integrate the Shutterstock API into their applications. This is expected to launch more platform partners and widen the company's appeal among consumers.

Disappointing earnings

Shutterstock's most recent quarterly results included 6.77% revenue growth, which was below market expectations of around 9%. Adjusted earnings per share increased 16.7% to 35 cents, which missed consensus forecasts of 42 cents. Excluding the impact of foreign exchange movements and the sale of Webdam in February 2018, the company's sales grew 11.1% in the first quarter. For a stock that has a price-earnings ratio of 27, this appears to be relatively low.

In order to boost sales and profitability, Shutterstock is seeking to strengthen its brand through a refreshed marketing program called "It's not stock, it's Shutterstock." The response among customers to the campaign has been positive, so it is expected to increase brand awareness while differentiating its offering versus sector peers. The company is also focusing on improving the efficiency of its sales process, while utilizing analytics to ensure its return on investment remains high.

Outlook

Shutterstock is expected to post 4.5% earnings per share growth this year, followed by a 5.6% increase the following year.

Although the price-earnings ratio suggests it is relatively expensive given its financial prospects over the next couple of years, the company's strategy could deliver an improving growth rate over the long run.

For example, new products, innovation and a focus on the customer experience could help to differentiate it from sector peers, while strengthening its competitive advantage. Its marketing investments may also strengthen its brand through increased customer awareness.

Having underperformed the S&P 500 in the last year, the stock could offer investment appeal in the long run.

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This article first appeared on GuruFocus.