Shutterfly (SFLY) Raised To Buy: What's Driving The Stock?

On Jul 17, we upgraded Shutterfly, Inc. (NASDAQ:SFLY) by a notch to a Zacks Rank #2 (Buy).

Shutterfly’s focus on improving operational efficiency through major restructuring should drive growth. The stock's estimates for the current year and the next year moved up 3.6% and 3.5%, respectively, over the last two months. This reflects analysts’ optimism in the stock’s prospects.

However, that is not yet reflected in its recent share price movement. The company has actually underperformed the Zacks categorized Internet Content industry, declining 4.3% over the last three months against the industry’s gain of 22.1%.

Nevertheless, you should not be concerned about the price remaining muted going forward. In fact, this year’s expected earnings growth over the prior year is 29.3%, which is anticipated to ultimately translate into price appreciation.

What's Favoring Shutterfly?

One of the most important factors behind the reinstated confidence in Shutterfly’s operations is the major structural changes that it announced in fourth-quarter 2016. The company plans to retire many of its brands in order to focus more on the profitable and cost-effective ones. Thus, Shutterfly plans to invest in a single Consumer platform, with all customers gaining from investment in the Shutterfly.com site. This, in turn, would reduce complexities of usage to a large extent, thereby increasing customer satisfaction.

Also, the company expects to reduce workforce by approximately 13% or 260 employees, which would result in an annualized cost decrease of roughly $25 million.

Meanwhile, continuous expansion in its range of products is a core part of Shutterfly’s strategy. The company is focusing on Tiny Prints as its premium cards and stationery brand as well as Shutterfly Wedding Store as a part of its wedding strategy, besides enhancing its home décor and statement gifts categories. Notably, this wide range of innovative offerings is expected to add greatly to the top line.

Additionally, the company is making progress with its Shutterfly 3.0 initiative, which encompasses a new integrated photo management solution, called the All New Shutterfly. This photo management service is anticipated to deepen the company’s relationships with its customers and drive sales over time. Furthermore, focus on improving technology-related offerings bodes well for the company.

Some Concerns

Shutterfly generally incurs loss in the first three quarters and makes profit in the final quarter of every year because of the seasonal nature of its business. Additionally, it is affected by vacation and other travel trends as these drive digital camera sales.

Going forward, higher costs pertaining to development of new production facilities, manufacturing, labor and training expenses as well as restructuring charges could pressurize margins.

Key Picks

Some other top-ranked stocks in the Internet Content industry that you may also like to consider are Angie’s List, Inc. (NASDAQ:ANGI) , Remark Media (NASDAQ:MARK) and WebMD Health Corp. (NASDAQ:WBMD) . While Angie’s List and Remark Media sport a Zacks Rank #1 (Strong Buy), WebMD holds the same Zacks Rank as Shutterfly. You can see the complete list of today’s Zacks #1 Rank stocks here.

Angie’s List and WebMD delivered an average positive earnings surprise of 176.67% and 10.05%, respectively, over the last four quarters.

Meanwhile, Remark Media has witnessed its current-year estimates climb 37.5% over the last two months.

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