Envato Integration And AI Initiatives Spark Revenue Growth Amid Calculated Challenges

Key Takeaways

• Envato’s subscription integration and AI-driven content increase paying subscribers, driving revenue growth and attracting new customers with expanded offerings.
  
• Data licensing for AI training and GIPHY’s TikTok partnership present revenue and margin growth opportunities through customer expansion and monetization.
  
• Shutterstock faces revenue challenges from declining content sales and high reliance on AI, with uncertain returns from recent acquisitions and marketing investments.

Catalysts

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

• The integration of Envato’s high value, low-cost, unlimited multi-asset subscription offering is resonating in the market, leading to an increase in paying subscribers. This is likely to drive enhanced revenue growth going forward as it fills a gap in their product suite and attracts new customers.
  
• AI-generated content has shown material growth, with existing customers adopting the Generative Plus subscription while maintaining or increasing traditional stock content usage. This can lead to revenue growth as AI and traditional content usage both increase.
  
• Shutterstock’s investment in Data Distribution and Services is showing strong growth potential, with opportunities for new customers to license data for AI model training and existing customers expanding their contracts. This can drive up both revenue and net margins due to the high-growth nature of these services.
  
• GIPHY’s business is experiencing significant user engagement growth, and the strategic partnership with TikTok is expected to expand monetization opportunities, providing a catalyst for revenue growth and potentially higher net margins.
  
• Ongoing share repurchase plans and dividend payouts are being supported by strong free cash flow and a solid balance sheet, which could enhance earnings per share (EPS) due to a reduction in shares outstanding.

Shutterstock Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shutterstock's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $121.1 million (and earnings per share of $3.35) by about November 2027, up from $36.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $98.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2027 earnings, down from 29.9x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Shutterstock Future Earnings Per Share Growth

Risks

• The decline in Shutterstock's content revenue (excluding the Envato contribution) by 7% year-over-year poses a risk that the company may face challenges in stabilizing or reversing this trend. This could critically impact its overall revenue and earnings.
  
• Despite positive integration outcomes, the Envato acquisition may present unforeseen challenges in aligning with Shutterstock’s existing operations, potentially affecting margins and profitability.
  
• Investments in sales and marketing are expected to increase in the fourth quarter, which if not yielding efficient returns, could negatively affect the net margins and adjusted EBITDA.
  
• The data services business, while showing impressive growth, is characterized by limited visibility due to its lumpiness, making it difficult to predict long-term revenue stability.
  
• High dependency on AI-generated content as a growth driver could pose risks if technological improvements don't meet market expectations or if customer preferences shift, potentially impacting Shutterstock’s future revenue streams.

Valuation

• The analysts have a consensus price target of $48.25 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 $56.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $121.1 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $31.2, the analyst's price target of $48.25 is 35.3% 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.