August 31, 2020 - 10:34am EST by
2020 2021
Price: 50.00 EPS 0 0
Shares Out. (in M): 36 P/E 0 0
Market Cap (in $M): 1,795 P/FCF 0 0
Net Debt (in $M): -311 EBIT 0 0
TEV (in $M): 1,484 TEV/EBIT 0 0

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Shutterstock is an underfollowed stock with a new management team and a renewed focus on profit. The company has installed a new CEO, CFO, Chief Product Officer and Chief Revenue Officer. In the most recent quarter, Shutterstock overdelivered on EBITDA margin, increasing from 14% to 23% quarter-over-quarter. Yet the stock trades at just 10x 2021 EBITDA. Because only three sell-side analysts cover the stock, investors have not appreciated management’s commitment to multi-year margin expansion and quarterly cash dividends. This is about to change. Four new sell-side analysts will initiate coverage soon as their firms underwrote an equity offering in early August. At its current share price of $50, I believe Shutterstock offers an asymmetric payoff profile of at least 4:1, with $45 in a downside scenario (10x lower 2021 EBITDA) and $70 in an upside scenario (15x higher 2021 EBITDA).


Company background

Shutterstock is one of the largest marketplaces for high-quality licensed photographs, videos and music. Founded in 2003 by its current chairman Jon Oringer, Shutterstock maintains a library of more than 340 million images and more than 19 million footage clips available to businesses, marketing agencies and media organizations. The use cases for stock content include social media, websites, digital and display advertising, email marketing and print collaterals. Customer sales are made through e-commerce (via self-service web properties) and enterprise channels. The competitors are Getty Images, Adobe and a long tail of smaller vendors. Shutterstock’s competitive advantages include network effect and superior search capabilities from having the largest library of stock content; flexible and low-cost pricing; and trusted brand for licensed, high-quality stock content. Shutterstock is headquartered in New York City and has been publicly traded since 2012. The company has generated positive cash flow every year since its IPO. The Board initiated a quarterly cash dividend of $0.17/share in Q1 2020.


Why the stock has been rangebound

Since 2015, the stock price has fluctuated between low $30 and mid $50. I believe the main reasons are:

·       Decelerating revenue growth and declining margin: Since 2015, revenue growth has decelerated from 30% to 4% in 2019. Over the same period, the EBITDA margin deteriorated from 20% to 15% as the prior management team failed to optimize the cost structure for slower growth (see Chart 1).  The reasons for decelerating revenue growth are: a) a maturing market for stock photos; b) the entry of Adobe following the acquisition of Fotolia in 2014; c) freemium competitors taking share in the low end of the market; d) poor internal execution, especially in the enterprise segment (see Chart 2). Prior management did not anticipate the transition to slower growth. As a result, the company had a track record of missing guidance.

Chart 1: Revenue Growth and EBITDA Margin


Chart 2: Enterprise vs. E-Commerce Revenue Growth


·       Lack of Wall Street interest: Only three sell-side analysts (Deutsche, Needham and Truist) cover the stock, with two having Buy ratings and one having a Hold rating. Of the six original underwriters from its 2012 IPO, only one maintains coverage today.

·       Controlling shareholder: Current Chairman and founder, Jon Oringer, owns close to 40% of the company. Jon had been the CEO since inception until he passed the role to Stan Pavlovsky this past February. I believe many investors are still wary over Jon’s substantial influence given the company’s prolonged period of underperformance.


Why the story is getting better

·       New management team: Until this past February, founder Jon Oringer had been the only CEO in the company’s history. Jon is an excellent technologist, but he could have been a better business operator. Under Jon’s leadership, the company was in denial about its slowing growth and spent as if the company was growing in the teens instead of the mid-single digits. Jon finally recognized that he needed to pivot the company for slower but more profitable growth. He brought in Stan Pavlovsky as the Co-COO in April 2019 and elevated him to CEO in February 2020.  New CFO Jarrod Yahes joined in late 2019. In addition, Shutterstock hired a new Chief Product Officer and Chief Revenue Officer in March 2020.  

·       Commitment to margin expansion: Since taking over the reign, Stan and Jarrod have sought to run the company more like a private equity business and tap into its inherent operating leverage potential. Specifically, they set the following objectives:

o   Grow the organic business at the market rate of 5-7% by introducing new products and turning around the enterprise segment.

o   Increase the lifetime value of existing customers by shifting to subscription.

o   Improve gross margin via royalty rate changes, cost optimization and acquisition of wholly owned content.

o   Reduce operating expenses, especially G&A. The CFO noted prior management had significant investment in areas with low ROI and staffed too many employees (500) in Manhattan’s Empire State Building.

o   Expand EBITDA margin every year. The CFO believes EBITDA margin can eventually reach the high 20%.

o   Pay quarterly cash dividend out of free cash flow.

In Q2, the company over-delivered on expectations with an EBITDA margin of 23%, up from 14% in Q1. The result was even more impressive considering Q2 had the full negative impact of COVID-19 and revenue was down only 1% on a constant currency basis. Management cautioned that 2H margin would come down compared to Q2 as they reinvest in partner solutions and performance marketing. However, I believe current consensus estimates are too low.

·       Turnaround in enterprise segment: To return revenue growth back to 5-7%, Shutterstock must reverse the decline in the enterprise segment (down mid-single digits in 1H 2020). To that end, Stan brought in a new Chief Revenue Officer with a deep sales management experience. The enterprise team will reorient its focus from customer service to sales and be given more product packages to sell. Shutterstock is also adding more partner solutions offerings, such as the integration with Facebook and Microsoft Advertising. Management believes enterprise billings should grow by Q4 2020.

·       Improved investor relations: Prior management had a poor reputation with Wall Street, having missed its guidance over consecutive quarters. The current CFO aims to reverse that perception by providing more conservative guidance. He has made himself more accessible to calls with investors. The company created a new interactive IR microsite to better educate investors with additional metrics such as subscription and revenue mix by verticals.

·       Additional sell-side coverage: To get more investors to notice the positive changes at Shutterstock, management realized it must have more sell-side coverage, especially from the bulge-bracket brokers. The August secondary offering will usher in four new sell-side analysts: BofA, Morgan Stanley, Stifel and JMP Securities. I believe these analysts will initiate their research coverage soon.



The company currently trades at 12x 2020 EBITDA. I believe consensus estimates are too low as evidenced by over-delivery in margin in Q2. In my downside scenario, I project 2021 revenue growth of 2%, below market growth of 5-7%, while the EBITDA margin expands from 18.2% to 19.0% (see Table 1). In my upside case, I project 2021 revenue growth at the high end of market growth of 5-7% while the EBITDA margin expands from 18.2% to 21.0%. At its current share price of $49, I believe Shutterstock offers an asymmetric payoff profile of at least 4:1, with $45 in a downside scenario (10x lower 2021 EBITDA) and $70 in an upside scenario (15x higher 2021 EBITDA). I believe there is more upside above $70 as the company demonstrates multi-quarter progress and investors contemplate EBITDA potential beyond 2021.


Table 1: Shutterstock Financial Projection














































Pricing compression: The prices at Shutterstock are comparable to those at Getty Images and Adobe for similar products. In recent years, freemium sites have offered aggressive pricing that could eat into Shutterstock’s market share. However, these freemium sites appeal to lower end of the market given their lesser brand reputation and limited inventory of high-quality assets.

Execution on enterprise: Management admitted this segment has the most work to do. However, given years of poor execution under the prior leadership team, I believe there is more upside potential.

Controlling shareholder: Jon Oringer could potentially exert a detrimental influence, but I do not believe this will be the case as his goals appear aligned with the new direction of the company.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Better than expected margin expansion

Revenue growth re-acceleration driven by enterprise turnaround

Increased sell-side coverage

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