1 Under-the-Radar AI Stock Way Undervalued?

Shutterstock (NYSE:SSTK) is a major marketplace for images, videos and audio content for online use. Though the company is well-known in its field, the stock has performed very poorly over the last few years.

SSTK shares peaked at over $120 in late 2021 and had fallen off to a bit under $50 by the start of this year. Now trading at about $40, Shutterstock has failed to capture the gains of the broader market in the last year and a half.

So, is the company on sale or is Shutterstock a value trap?

Revenues Up 5 Years In a Row

Shares of Shutterstock trade at a very modest 8.6x forward earnings and 6.9x cash flow.

At 1.6x, the price-to-sales ratio is a bit less attractive but still far from being considered elevated. Notably, prices have fallen by almost 60% in the last three years, despite the fact that revenues have climbed in each of the past 5 years.

In Q1, though, Shutterstock’s revenue remained essentially flat compared to the year-ago quarter while net income fell from $32.8 million to $16.1 million. As a result, earnings per diluted share fell 50% from $0.90 to $0.45.

One piece of good news in Q1, though, was the continued growth of revenue from data, distribution and services. This category rose 90% year-over-over to account for $40.5 million in quarterly revenues.

Though a modest percentage of the total $214.3 million in revenue Shutterstock brought in during the quarter, it revealed a bright spot in the business.

Another positive was the acquisition of Envato, a similar content licensing platform. The deal effectively doubled the company’s user base and vastly expanded its media library. Shutterstock acquired the company in an all-cash deal for $245 million.

Is Shutterstock a Value Trap?

Despite attractive multiples, there is some concern that Shutterstock is a value trap.

Revenue growth rates have been slowing since 2021, and quarterly net incomes have fluctuated between high growth rates and double-digit drops over the same period.

Shutterstock lacks a wide competitive moat. The company maintains an estimated market share of just 1.5% in the photo content marketplace industry. This compares very poorly to majors like Unsplash, Pexels and iStock with market shares of 37.5%, 20.7% and 12.9%, respectively.

This problem is compounded by a decline in subscriber counts over the last year. At the end of Q1 2023, Shutterstock had 559,000 subscribers. A year later, that number had fallen to 499,000.

While trailing 12-month revenue per average customer climbed from $356 to $418, the number of paid downloads slipped from 42.7 million to 35.0 million. These trends could spell trouble for Shutterstock if they continue, since the company may not be able to raise its revenue per user fast enough to keep offsetting its shrinking user base.

Despite these headwinds, it’s unlikely that Shutterstock is a value trap at the moment. Even with ups and downs in net income growth, earnings have stabilized well above pre-2020 levels. Unless earnings continue to fall, it seems unlikely that investors will find themselves wandering into a dangerous value trap by buying Shutterstock.

Where Will Shutterstock Stock Be In 2027?

Even though Shutterstock has somewhat stalled in terms of growth and lacks a strong moat, it’s worth acknowledging that management has an ambitious plan for the company’s future.

Under that plan, dubbed “Shutterstock 2027,” the company is set to grow revenues to a total of $1.2 billion in the coming three years. If net margin rates hold steady at 10.7%, this would result in a net income of about $128.4 million.

This plan hinges on driving revenues from new forms of content, particularly video, music and 3D images.

Shutterstock has also created its own generative AI service, available with a paid subscription. As AI images become more widely used by businesses for content and marketing purposes, Shutterstock has a chance to become a go-to destination in this field.

Another major growth catalyst for the company is likely to be the sale of data for training AI models. With hundreds of millions of images and video clips, Shutterstock has a ready-made dataset for training large, complex AI models.

The company has entered into partnerships with OpenAI and other tech companies to monetize this data, a business line that may well become very lucrative in the coming years as demand for training datasets grows.

How High Can Shutterstock Stock Go?

Shutterstock stock can go as high as $58 per share according to the consensus estimate of 5 analysts. Though this may reflect a best-case scenario for Shutterstock, it seems likely that the stock will begin to move upward again over the next year.

It’s also worth noting that a discounted cash flow forecast model places fair value closer to $71 per share, suggesting even more upside potential.

With the selloff that has taken place over the past few years, there is a good chance that Shutterstock is substantially undervalued.

Another point that’s worth considering is the fact that SSTK shareholders are also paid a respectable quarterly dividend.

Each share of the stock pays $1.20 a year, or 3.1% at current prices. Management has been raising the dividend for four years, and the payout ratio is still only 46.5%.

Assuming Shutterstock can keep its net income from falling further, this leaves a decent amount of headroom left for future dividend hikes.

With that said, Shutterstock also looks fairly risky. Recently performance has been less than inspiring, and expectations of rising share prices hinge on management driving a new surge in sales and earnings growth.

Though the company doesn’t actually appear to be a value trap, investors risk lackluster returns if management stumbles in executing their growth strategy. For now, with 5 years of impressive revenue gains, that doesn’t look to be the base case scenario, though.

Much of the stock’s future will hinge on the success of Shutterstock 2027. If management can sustain low double-digit revenue growth over the next few years, it’s very likely that share prices will rise in tandem.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.