Shutterstock: A Leader In The Changing Stock Image Industry (NYSE:SSTK)

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I am bullish on Shutterstock (NYSE:SSTK) as its metadata offerings and long-term partnerships with leaders in the AI space has shown its growth potential in its Q3 results. I believe Mr. Market has overlooked their potential as the company has been traded sideways, between its 52W high at 81.23 and 52W low ending at 33.80, ending 2023 at ~US$48. Compared to its closest trading peer Getty Images (GETY), Shutterstock trades an incredible discount with an Enterprise Value/LTM Sales Ratio of 1.94x while Getty Images is at 3.67x. Not to mention, Shutterstock has maintained its revenue growth, cost discipline and profitability since 2009 and Getty Images struggles with profitability and its debt. Therefore, I see an enormous ~80% upside potential for Shutterstock, with a target price of US$87.9.

Investment Thesis

Shutterstock has the first-mover advantage in the development of generative AI. Generative AI will be an important battleground ground for marketing tools for the following reason: The ability to build on existing content with close-to-zero cost and create content according to their original idea.

Computer Vision Data Partnership Revenue (AI Training Data Licensing): In June 2023, OpenAI signed a 6-year licensing deal with Shutterstock to license their media content to train their generative AI. We only managed to get a glimpse of how big this deal is from Q3 2023’s SEC filings. Considering how Shutterstock is planning to pay its image contributors through the Contributor Fund, Shutterstock is likely getting paid a fixed sum per image from OpenAI’s DALL-E image generator. As AI image generators gain prevalence, I believe this segment of revenue will be the main growth driver for Shutterstock going forward.

In terms of AI competition, there are other competitors, e.g. MidJourney. However, the key selling point for OpenAI’s DALL-E is that the images generated are available to be licensed. The ongoing issue with generative AI’s is that some of the data used for training the algorithm was scraped off the internet with no regard for copyrights. This makes the companies that use their images liable for potential lawsuits like the ongoing Getty Images case.

One of the best advantages that Shutterstock has is its large database of images and videos. As of Q3 2023, Shutterstock has 757mm images and 52mm footage clips, while Getty Images has 525mm images and 27mm footage clips. Training AIs takes a lot of data.

Overview

Shutterstock is a content licensing business that makes its revenue from two broad segments:

1. E-Commerce marketplace – Freelancers upload their photos, illustrations, music, and videos for customers (marketing departments) to purchase the license to use in their marketing campaigns. The platform brings together users and contributors of content by providing readily – searchable content that our customers pay to license and by compensating contributors as their content is licensed. Contributors upload their content to Shutterstock’s web properties in exchange for royalty payments based on customer download activity.
2. Enterprise – Shutterstock provides custom, high-quality content matched with production tools and services at scale. They also licenses the metadata associated with their images, footage clips, music tracks, and 3D models through their computer vision data partnerships offering, which is used by large technology companies as training data for their individual generative AI and machine learning needs.

The company consists of multiple brands such as Shutterstock; Pond5, Giphy, TurboSquid, Offset, PremiumBeat, Bigstock, PicMonkey, and Splash News.

Click to enlarge

E-commerce Market

Shutterstock’s e-commerce segment has benefited immensely from COVID-19 as marketing spend from SMBs rose and photographers were restricted from leaving their homes, educing the supply of photographs and images. The stock image industry took the opportunity to raise prices, as seen from an incredible 18.8% yoy growth in E-Commerce revenues in 2021.

Initially, Shutterstock was positioned as the low-cost stock image provider as compared to Getty Images. However, free image licensing websites and the lack of competitive moat in the e-commerce space will ultimately lead to thinning of margins and falling revenues as customers have abundant choices.

Another important factor for these stock image providers is the utility of their search engine. The massive library of images means nothing if the marketing team is unable to search. According to Shutterstock’s CEO, Shutterstock fared better than Getty Images’ in this field because of how Shutterstock approached the stock image business from a Tech standpoint. Hence, this increases the utility of their tools as marketing teams can more easily search for their desired image.

Business Model (Subscriptions and Non-subscriptions)

For subscription vs non-subscription, I think what most people get excited about is that Shutterstock can revamp its revenue structure into something that is purely subscription, guaranteeing revenue visibility and growing subscriber count. But I am not as optimistic about this.

Within the e-commerce segment, customers are offered one-off license purchases or a monthly subscription that entitles them to use a few photos and videos a month.

The Enterprise revenue consists of (1) subscription services similar to the E-Commerce segment, (2) custom studio services and (3) metadata offerings for Generative AI training.

Excluding the new metadata offerings, the business model is pretty much mature already as seen from the subscriber revenue. The recent 400 bps drop in % Subscriber revenue contribution from 41.9% in Q2 2023 to 37.9% Q3 2023 to was due to the growing metadata offering revenue growth.

As seen below, overall subscription has grown substantially over the past 4 years, with a larger proportion attributable to SSTK’s acquisition of Creative Flow Plus and PicMonkey (230,000 subscribers) in Q3 2022. Management believes that:

…[They] have likely given up some of the lower quality customer growth [they] may have acquired during the pandemic and are now building off a more stable base of core customers” (Q3 2023 Transcript).

I think while the subscription business can still grow organically, the business is not a growth centre. Acquisition of small online editing tools like PicMonkey seem to lose out to Canva in this space because Canva is so seamlessly integrated for marketing professionals and students. There is a network effect where Canva gains traction as the leading marketing tool as it offers full-flow creative solutions and people get used to their user interface.

Furthermore, the huge jump of 230k subscribers in Q3 2022 barely made a dent in the subscription revenue as each user is only about US$72 per annum, which is ~US$4 mm per quarter (less than 5% of subscription revenue). These subscribers aren’t enough to shift the topline. This would mean that their organic subscriptions aren’t growing and are, in fact, shrinking or Shutterstock is cutting prices to remain competitive.

Competitor Analysis

Getty Images is considered to be the premium stock image provider, while Shutterstock is positioned as the more affordable option.

I believe that it is clear that Shutterstock has been more successful in growing its revenue through acquisitions than Getty Images and has been more successful in capitalising on the COVID-19 situation. However, SSTK is catered more to SMB’s and individuals, which is why their marketing expense is higher, resulting in a significant EBIT margin difference. Operationally, in the traditional stock image industry, Getty Images has an advantage due to its premium positioning.

However, Getty suffers from immense debt that restricts its cashflow. With a Net Debt of US$1.4 bn, Getty’s net margins attributable to shareholders (Getty has high interest expense and preferred stock dividends) lags behind Shutterstock. Additionally, if we look at Getty’s 2007 historical performance before delisting, its revenue was US$858 mm, which means it has been stagnant since then.

Shutterstock is a better target as it is traded at EV of ~US$1.7 bn (Virtually no debt – 2x EV/LTM Sales) while Getty has an EV of ~US$3.5 bn (~US$2.1 bn Market Cap, ~US$1.4 bn in Net Debt – 3.5x EV/LTM Sales). Furthermore, Shutterstock has been profitable since 2009, while Getty Images is currently struggling with paying off its debt.

Overall, I find that Shutterstock has been unfairly penalized and trades ridiculously cheap compared to Getty Images: It has managed to create new avenues of growth while maintaining profitability and maintaining a disciplined balance sheet.

Performance Analysis

Removing away the additional one-off “Bargain Purchase Gain” of US$51mm from its income statement, Shutterstock has made an adjusted net income of ~US$60mm for the past 9 months (likely to end 2023 with US$80mm). This would represent an LTM P/E of ~21.6x.

In Q3 2023, their operating expense margin is 93% (COGS: 40%, Marketing: 24%, Product Development: 12%, G&A: 16%). The earnings call mentioned that the spike in Product Development expenses was due to “Giphy-related retention compensation costs” and severance. This also impacted G&A expenses. In Q1 2023, prior to Giphy’s acquisition, Product Development expenses was 7% of total revenue (compared to 12% in Q3 2023). Thus, I expect margin expansion of 8% as Shutterstock completes the Giphy acquisition and further optimises its cost structure.

My expectation for 2024 is that Shutterstock is: Revenue of US$950mm – US$1bn, Net Margins of ~15%, Net Income of US$140-150mm, representing a FWD P/E 11.5x – 12.3x.

Valuation

I am using relative valuation multiples to compare Shutterstock and Getty Images. The reason I would favor using EV/Sales as my main metric to properly reflect the SSTK’s and GETY’s capital structure vs topline. If I were to use EV/EBITDA or EV/EBIT, it would fail to account for the massive interest expense that GETY has to pay for. Furthermore, I did not use P/E because GETY is at a net loss.

On a Forward basis, Shutterstock is currently trading at a 1.94x EV/NTM Revenue, while Getty Images is trading at 3.42x EV/NTM Revenue. With a CAPIQ consensus 24E estimate of US$919mm, my Enterprise Value for SSTK would US$3,143 mm.

EV= Market cap + Net debt

Market cap = EV – Net Debt = US$3,143 mm – US$3.7 mm= US$3,139.3 mm

Compared to its current market cap of US$1,740 bn, that’s a potential upside of 80.4%. With a share outstanding of 35.71 mm, that is a target share price of US$87.91.

On an LTM basis, if I were to value Shutterstock to be equivalent to Getty (3.5x EV/LTM Sales), with Shutterstock’s LTM 2023 Sales of ~US$875mm, my Enterprise Value for SSTK would US$3,211 mm.

EV= Market cap + Net debt

Market cap = EV – Net Debt = US$3,211 mm – US$3.7 mm= US$3,207.3 mm

Compared to its current market cap of US$1,740 bn, that’s a potential upside of 84%. With a share outstanding of 35.71 mm, that is a target share price of US$89.81.

Key Risk

The main risk I have for my investment thesis is that Shutterstock fails to form more AI data partnerships and that the revenue model of this AI data partnership is non-recurring.

While the subscriptions falling will impact Shutterstock, my main focus for Shutterstock is how it navigates the AI data partnership space.

Additionally, if high-quality photos (like Award-winning photos as opposed to HD images on a normal phone) affect Generative AI models significantly, this could also lower Shutterstock’s AI value proposition compared to Getty’s more-premium content.

Conclusion

I would like to reiterate that the main driver of growth is not going to be subscribers unless the subscriber count somehow 3x its current base within the next year. This doesn’t mean I think its business will but rather that it has matured.

The main driving force for this company will be the liberalisation of Generative AI models. Open-source generative AI models are becoming abundant as the framework has already been built. What businesses require to train their generative AI models are large volumes of data, which is what Shutterstock has.

Shutterstock is gradually transitioning from an e-commerce platform for marketing and stock images into a niche player in the generative AI space.