Shutterstock: digital content marketplace with 60.3% upside potential

  • Current price - 37.83
  • Entry Price - 38.05
  • Target price - 61.00
  • Position size - 2%
  • Risk - Average
  • Horizon - 12 months
  • Potential - 61.25%

What's the idea?

  • Visual content is increasingly used in advertising around the world, driving demand for Shutterstock's services.
  • The company has a large target market, especially in the Data, Distribution, and Services segment, with revenue nearly doubling in Q1 2024 due to the company’s partnerships with neural networks.
  • The global digital content market is expected to grow at a compound annual growth rate of 6.1% through 2032 to reach $285.94 billion by the end of the forecast period.
  • The recent acquisition of Envato will allow Shutterstock to double the number of subscribers, as well as increase annual revenue by 20% and adj. EBITDA by 15%.
  • Due to improved business performance in Q1 2024, Shutterstock increased its 2024 revenue growth forecast to 5.5%–7%.
  • The company pays dividends with an annual yield of 3.03% and also has a share buyback programme with an authorized amount equivalent to 5.05% of its market capitalisation.

About Company

Shutterstock (SSTK) Shutterstock is a global platform that connects content creators and media companies. Content creators receive royalties for uploading their audio, video, photo and other works to the Shutterstock library, while media companies find the content they need and use it on the basis of a license agreement. In addition, Shutterstock offers various services to platform users to improve and edit content, as well as to integrate with neural networks (OpenAI, Dall-E 2, etc.). Shutterstock was founded in 2003 and is headquartered in New York, USA.

Why do we like Shutterstock Ink?

Reason 1. Significant target market

Shutterstock is a global platform that connects content creators and media companies. Content creators receive royalties for uploading their audio, video, photo and other works to the Shutterstock library, while media companies find the content they need and use it based on a license agreement.

Shutterstock's revenue is split into two segments:

The Content segment represents a library of intellectual property rights acquired by Shutterstock's customers. It is a key segment of the company's business and accounts for the majority of its revenue. Shutterstock's content is distributed through multiple channels, represented by the platform of the same name, as well as the services of Pond5, TurboSquid, PicMonkey, PremiumBeat, Splash News, Bigstock and Offset.

TThe Data, Distribution and Services segment includes revenue generated by the company's other businesses, including content editing tools, revenue from the Giphy platform, revenue from the Gmail business, and revenue from the Gmail business.

Company's revenue structure
Company's revenue structure

Various studies show that the importance of visual content in the modern world is constantly growing. First of all, photo, video and other formats of non-textual information transmission are actively used in the advertising industry.

According to Venngage, nearly half of marketers surveyed reported that at least 50% of the ad content they create is in non-text formats.

The importance of visual content in marketing
The importance of visual content in marketing

At the same time, nearly one in two of the marketers surveyed said they use photos from stock resources that sell intellectual property rights to such content. Shutterstock is one such resource.

According to the IAB's forecast, digital video ad spending in 2024 will grow nearly 80% faster than media overall. At the same time, creating a video ad involves using more visual and audio content than creating a static ad. Thus, as digital ad spending grows, demand for stock products is likely to increase.

Shutterstock believes it is positioned for further expansion in the fast-growing content-related markets.

For example, with annual content licensing revenue of $0.74 billion, Shutterstock estimates its Total Addressable Market (TAM) in this part of the business at $8 billion.

Company TAM
Company TAM

The Data, Distribution, and Services segment is projected to have an even more significant outlook, with total TAM for all areas of this segment estimated at $151 billion with revenue of $0.14 billion in 2023.

According to Shutterstock, the Data, Distribution, and Services revenue nearly doubled in Q1 2024 compared to the same period in 2023. The company expects to continue to grow revenue from this area at a rapid pace.

According to Business Research Insights, the global digital content market was valued at $167.59 billion at the end of 2023, and is expected to reach $285.94 billion by 2032, growing at a compound annual growth rate (CAGR) of 6.1% during the period.

Thus, Shutterstock is a major player in the marketing industry that allows companies to legally use other people's intellectual property. At the same time, not only is the amount of digital content being created growing, but so is the demand for data visualization in advertising and business. Shutterstock is well positioned to capitalise on these trends.

Reason 2. Important M&A deal and partnerships with neural networks

In May 2024, Shutterstock announced that it had entered into a definitive agreement to acquire Envato, a major stock platform, for $245 million. The service provides its customers with an extensive library of digital data in various formats, as well as a wide range of templates for creating and editing videos, presentations and other materials. The acquisition of Envato significantly complements Shutterstock's customer offering, and also gives the company access to new promising market niches, as management noted on its Q1 2024 investor conference call.

First, Envato has a large customer base of mostly freelancers, small marketing agencies and small businesses — an audience that Shutterstock has had little access to.

An important difference between the two companies' businesses lies in their payment models: Shutterstock charges a flat fee per file download or provides a subscription with a limit on the number of downloads, while Envato provides a single subscription with unlimited downloads. This subscription costs $16.5 per month, and Shutterstock plans to keep this payment model unchanged to retain Envato's current audience.

Meanwhile, more than 55% of all subscribers to the acquired platform pay for a year's worth of services on an upfront model. If Shutterstock manages to retain Envato's current audience, the combined business could achieve higher customer retention rates, which will be aided by the annual subscription term. Overall, the acquisition of Envato will more than double Shutterstock's subscriber base.

Shutterstock subscriber growth through the acquisition of Envato
Shutterstock subscriber growth through the acquisition of Envato

Second, by acquiring Envato, Shutterstock has taken another step toward diversifying its content library, namely reducing its reliance on static images, which currently dominate revenue. As a result of the deal, audio, video, graphics, 3D images and templates are expected to account for about 45% of Shutterstock's total revenue, up from 35% in 2023.

Company's revenue structure
Reducing the dependence of revenue on static images

The Envato library has 6 million videos (11.11% of Shutterstock's volume), 1 million audios (about 25% of Shutterstock's volume), 0.3 million 3D models (23.08% of Shutterstock's volume), and also contains templates, graphics, and fonts.

Third, the Envato deal will make a significant contribution to Shutterstock's financial performance upon closing, which is expected to occur in Q3 2024: Shutterstock management forecasts that the acquisition will enable the company to increase annual revenue by 20% and adj. EBITDA by 15%.

Against this backdrop, Shutterstock has raised its revenue forecast for 2024 from flat (made after the announcement of its 2023 results) to growth of 5.5%–7%.

In addition, during the recent conference call with investors, Shutterstock management noted that the acquisition of Envato will accelerate the company's targets, which are now set for 2028. According to these targets, Shutterstock's revenue will grow at a CAGR of 10% in 2024–2027 to reach $1.2 billion by the end of the forecast period, and adj. EBITDA will grow at a CAGR of 12% to reach $350 million.

Shutterstock's revenue and earnings growth forecast through 2028

Shutterstock's revenue and earnings growth forecast through 2028
Shutterstock's revenue and earnings growth forecast through 2028

As a result of being ahead of target, Shutterstock plans to update its long-term financial guidance to 2024.

Shutterstock's partnerships with companies developing generative artificial intelligence models, including Google's imaging, OpenAI's DALL.E 3, and Amazon's Titan, are also important to its business. Because Shutterstock has one of the world's largest libraries of digital content, the company is an important partner for training neural networks to be able to generate content precisely tailored to user requests.

As noted earlier, Shutterstock's Data, Distribution, and Services segment is growing at a very high rate, with revenues increasing 256% through 2023 and 90% in Q1 2024. A key reason for this growth is the expansion of partnerships with artificial intelligence companies that purchase metadata from Shutterstock related to the company's digital content library.

In addition, Shutterstock recently integrated neural network functionality into the interface of its own products, giving its customers direct access to generative AI features.

Thus, the recently announced agreement to acquire Envato, as well as deepening partnerships with neural networks, will enable Shutterstock to improve its business model through a better customer offering. In addition, Envato's contribution to the overall business has been so significant that Shutterstock has announced a revision of its financial guidance to 2028, which is likely to be well received by the market.

Reason 3. Share buyback program and dividends

Shutterstock increased its dividend to $0.3 per share earlier this year, representing an annualised dividend yield of 3.03%. This is the fourth consecutive year that the company has increased its dividend.

Shutterstock earlier this year increased its dividend to $0.3 per share, representing an annualized dividend yield of 3.03%. This is the fourth consecutive year that the company has increased its dividend.

Shutterstock Dividend payout
Shutterstock Dividend payout

In addition, Shutterstock distributes capital to shareholders through a $100 million share buyback program that was adopted in June 2023. At the end of Q1 2024, the company had $71.8 million left to allocate to the buyback, which corresponds to 5.06% of its market capitalization.

Thus, the continued increase in dividend payments and the existence of a share buyback programme demonstrate Shutterstock's management's commitment to increasing the return of capital to shareholders, which is particularly important in light of the company's expected growth in financial performance.

Financial performance

Shutterstock's trailing twelve months (TTM) financial results can be summarized as follows:

  • Revenues totaled $873.62 million, down 0.11% from 2023.
  • Adj. EBITDA decreased from $240.78 million to $226.99 million. Adj. margin fell from 27.53% to 25.98%.
  • Net income was $93.55 million compared to $110.27 million at the end of last year.

Revenue remained broadly flat. The decline in profit and margin was mainly due to an increase in marketing and development costs, which we believe is justified in the context of the company's growth and market share expansion.

Dynamics of the company's financial results
Dynamics of the company's financial results

Shutterstock's Q1 2024 results are summarized below:

  • Revenue decreased 0.45% year-over-year (YoY) to $214.32 million.
  • Adj. EBITDA fell from $69.76 million to $55.98 million.
  • Net income was $16.12 million compared to $32.84 million a year earlier.

Dynamics of the company's financial results in Q1 2024
Dynamics of the company's financial results in Q1 2024

  • TTM's operating cash flow decreased to $82.08 million from $140.55 million at year-end 2023.
  • Free cash flow decreased from $138.47 million to $98.85 million.

The decrease in operating and free cash flows is primarily due to lower net income and working capital, as well as higher capital expenditures in 2024.

Company cash flow
Company cash flow

Shutterstock has a perfectly healthy balance sheet:

  • The total amount owed is $58.75 million.
  • Cash equivalents accounted for $71.81 million.

This level of debt load indicates excellent financial stability of the company.

Shutterstock expects positive financial results through 2024.

Forecast of the company's financial results
Forecast of the company's financial results

Therefore, management's guidance underpins confidence in the value creation potential of the business.

Stock valuation

Shutterstock is trading at a discount to the industry average with EV/Sales at 1.64x, EV/EBITDA at 6.30x, P/E at 15.50x and Fwd P/E at 9.27x.

Comparable estimate
Comparable estimate

The average price target from the top-4 Wall Street investment banks is $62.3 per share. According to our consensus, the company is undervalued by industry average and historical multiples; the stock’s fair market value is $61 per share, which implies a potential upside of 60.3%.

Price targets of investment banks
Price targets of investment banks

Key risks

Declining subscribers. Shutterstock's customer base had been gradually declining in the past year prior to the Envato acquisition. If the company fails to reverse this trend or starts losing Envato's audience, it could trigger a negative market reaction that could lead to a decline in Shutterstock's capitalization.

Slowdown in revenue growth from licensed images. Due to the significant size of its static image library, Shutterstock is struggling to grow revenue from this area, which accounts for the majority of the company's total revenue. If Shutterstock is unable to increase media files in other formats, it could lead to slower growth and jeopardize the company’s 2028 targets.

Business threat from neural networks. While Shutterstock is currently successfully growing revenue through partnerships with neural networks, these agreements involve training generative AI models to reproduce media files. If, in the future, neural networks become so advanced that they do not need to be trained on human-generated images and videos, this could jeopardize the company's intellectual property licensing business by shifting its customer base to neural network services.

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