Aside From the Buyout Rumors, Should You Buy Shutterfly (SFLY)?

Bloomberg has reported that small cap digital photo services and solutions stock Shutterfly, Inc (NASDAQ: SFLY) is in talks with investment bank Qatalyst Partners to find buyers for the company – meaning its worth taking a closer look at the stock which has no close publicly traded peers left albeit the stock does compete with Hewlett-Packard Company's (NYSE: HPQ) Snapfish and services offered by retailers like CVS Caremark Corporation (NYSE: CVS).

What is Shutterfly, Inc?

Founded in 1999, small cap Shutterfly is the leading manufacturer and digital retailer of high-quality personalized products and services offered through a family of lifestyle brands. These brands include:

Shutterfly, where your photos come to life in photo books, cards and gifts. Tiny Prints, premium cards and stationery for all life's occasions. Wedding Paper Divas, wedding invitations and stationery for every step of the planning process. Treat, personalized greeting cards that really stand out. MyPublisher, one of the pioneers in the photo book industry and creator of easy-to-use photo book-making software. ThisLife, a private, cloud-based solution that makes it easy for consumers to find, share and enjoy their photos and videos, all in one place. BorrowLenses, the premier online marketplace for photographic and video equipment rentals. What You Need to Know or Be Warned About Shutterfly, Inc

Anonymous sources have told Bloomberg that Shutterfly is working with boutique investment bank Qatalyst Partners LLC to find buyers but preparations are still at an early stage and may not lead to a transaction. Potential acquirers include private-equity firms as well as e-commerce and Web storage companies plus Bloomberg noted that large internet companies like Google Inc (NASDAQ: GOOGL) and Facebook Inc (NASDAQ: FB).

Shutterfly is interesting because it allows customers to print photos onto items like mugs, pillows and iPad cases plus the company has made acquisitions in its own right, including Tiny Prints and Wedding Paper Divas to round out a portfolio of stationery, greeting cards and invitations. The company also acquired Kodak Gallery from troubled Eastman Kodak Co. back in 2012.

A look at Shutterfly's financials reveals an upward trend in revenues of $783.64M (2013), $640.62M (2012), $473.27M (2011) and $307.71M (2010) along with mixed net income of $9.29M (2013), $23.00M (2012), $14.05M (2011) and $17.13M (2010). At the end of last March, Shutterfly had $339.03M in cash and short-term investments to cover $246.36M in long term debt.

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At the end of last April, Shutterfly reported a 17.5% revenue increase to $137.1 million for the 53rd consecutive quarter of year-over-year net revenue growth along with a GAAP net loss of $34.2M verses $12.4M for the first quarter of 2013. The full year outlook calls for net revenues to range from $903.0 million to $920.0 million for a year-over-year increase of 15.2% along with a GAAP operating income/(loss) to range from ($0.6) million to $9.2 million. The CEO commented:

"Q1 was a strong start to the fiscal year, with solid growth in our consumer business. Leveraging our integrated marketing approach and data driven pricing and promotional strategies, we were able to improve our brand awareness and customer engagement and drive healthy increases in customers, orders and average order value. I am pleased with our sustained high level of execution and remain confident in our strategy and ability to transform the multi-billion dollar memories, social expression and personalized products markets from offline to online."

However, it should be mentioned that in mid-March, Cowen downgraded Shutterfly by two notches to Underperform from Outperform, citing a recent growth slowdown that has continued into 2014 driven by competition, poor mobile performance and pricing pressures. Cowen's Kevin Kopelman commented:

"We no longer expect to see pricing improve, and now believe discounting is likely part of a longer term trend, driven in party by excess printing capacity in the industry and slower growth in consumer demand."

Cowen also lowered their price target to $39 from $56.

Share Performance: Shutterfly, Inc   

On Wednesday, small cap Shutterfly surged 14.92% to $50 (SFLY has a 52 week trading range of $36.30 to $59.93 a share) for a market cap of $1.93 billion plus the stock is down 2.1% since the start of the year, down 10.6% over the past year and up 231.8% over the past five years. Here is a look at the long term performance against major benchmarks:

As you can see from the above performance chart, Shutterfly has actually outperformed major indices over the long term albeit its been a bumpy ride for investors at times. However, the latest technical chart is sending mixed messages to investors and traders alike:

The Bottom Line. Unless you want to speculate on buyout rumors, I am sure investors can find better stocks with less competition to put their money than Shutterfly.