Envato Acquisition And GenAI Integration Set To Revolutionize Content Creation And Drive Growth

Key Takeaways

• Shutterstock's acquisition of Envato and strategic focus on integrating GenAI capabilities, such as partnerships with NVIDIA and Databricks, aim to enhance content diversification and innovation.
  
• Significant growth in the DDS segment and efforts to simplify product offerings highlight a strategy towards driving higher revenue streams and improving customer retention.
  
• Shutterstock faces challenges in content revenue, customer acquisition, and DDS segment volatility, potentially affecting revenue growth, market penetration, and profitability.

Catalysts

Provides platform to connect brands and businesses to high quality content in North America, Europe, and internationally.

• The acquisition of Envato by Shutterstock is expected to strengthen its content business by broadening its digital asset offerings and templates, likely impacting future growth in revenue by attracting a wider customer base and improving content diversification.
  
• Shutterstock's strategic focus on integrating GenAI capabilities into its offerings, such as GenAI 3D capabilities in partnership with NVIDIA, and Shutterstock ImageAI with Databricks, aims to position the company as a leader in innovative content creation, potentially increasing its product appeal and driving higher margins through technology-driven content solutions.
  
• The significant growth in the Data, Distribution and Services (DDS) segment, highlighted by hyper-growth of 129% in Q2, indicates a rapidly expanding market demand for Shutterstock's data services, which could substantially boost future revenue streams and contribute to a diversified growth strategy.
  
• Efforts to simplify the product offering across Shutterstock's brands, including offering unlimited subscriptions, are designed to enhance customer experience and retention, likely contributing to long-term revenue growth by making the platform more attractive to both existing and new customers.
  
• Investments in sales talent and partnership developments, particularly in the rapidly growing DDS segment and the integration of services like GIPHY, demonstrate Shutterstock's commitment to capturing market share and fostering revenue growth through expanded market presence and enhanced service offerings.

Assumptions

• Analysts are assuming Shutterstock's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $156.5 million (and earnings per share of $4.31) by about September 2027, up from $47.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, down from 25.2x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 1.83% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

• Decline in content revenue of 9% versus the previous year, suggesting challenges in sustaining and growing this crucial aspect of Shutterstock's business, potentially impacting future revenue growth.
  
• Difficulty in new customer acquisition in small- and medium-sized segments could signal an underlying issue in market penetration or value proposition, affecting revenue diversification and growth.
  
• The expected gradual improvement in the Content business taking longer than anticipated implies potential for ongoing underperformance in this segment, impacting overall financial health and growth forecasts.
  
• Investment in the Data, Distribution, and Services (DDS) segment may not sustain the exceptional growth observed in the first half of the year, introducing volatility and unpredictability in revenue and earnings.
  
• Increased sales and marketing expenditure necessary for driving growth in the DDS business could dilute margins if revenue growth does not offset these costs, affecting net margins and profitability.

Valuation

• The analysts have a consensus price target of $53.25 for Shutterstock based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $156.5 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $33.5, the analyst's price target of $53.25 is 37.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.