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Tech stocks - Wednesday, July 16, 2008

Tech:stocker - Shutterfly: Another Silicon Valley 150 Stock That Needs To Be Avoided

After yesterday's column on CyberSource, we at tech:stocker received several emails wondering how we could not give them a better rating considering the San Jose Mercury News listed them as one of Silicon Valley 150 in 2007. We were a surprised that a company like CyberSource, having a hard time delivering any type of profit, was placed on any list that wasn't titled "loser", "failure", or "business disasters". So we at tech:stocker took a look at the list to see if there were any other treasures that should remain buried.

To our surprise, we found Shutterfly (SFLY:NASDAQ), the "Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories by leveraging our technology-based platform and manufacturing processes." Basically, Shutterfly prints your pictures, photobooks, mugs, and a number of cheesey items that you can put your kids' mug on and give to relatives that have everything.

In the interest of full disclosure, the wife and I are avid fans of Shutterfly. We've used it religiously for the last six years and wouldn't even consider using anything else to print and share pictures of our kids. But as you can guess by the title of this post, this company won't be getting a dime of our investment money and shouldn't get any of yours.

Ordering pictures to be printed online appears to be a very crowded industry with everyone from the legendary Kodak (EK:NYSE) to wholesale giant Costco (COST:NASDAQ) looking to earn your photo business. And let's not forget tech geek favorite flickr and Google's (GOOG:NASDAQ) Picasa. For prints, $.15 per print seems to be the industry average and Shutterfly often offers this pricing in its many sales.

If you take a basic look at Shuttefly's EPS per quarter, you would see that for 2006 and 2007 the company has returned a negative EPS in every quarter but the fourth. We would expect similar results from a specialty retailer like a hobby store versus a service that can be taken advantage of year round. Either Shuttefly's true strength is a unique ability to over charge customers for calendars and key chains, or Shutterfly is the preferred provider of Hanukah and Christmas prints.

Even more troubling is how the company is hurting its profits further by increasing its marketing spending without achieving proportionate results. While we respect that CEO Jeffrey Housenbold is an avid photographer and earned is MBA from Harvard University, we have to wonder if Mr. Housenbold was photographing the many characters in Harvard Square instead of attending the class "How To Build A Profitable Company".

And its too bad Shuttefly hasn't figured out to achieve profitability two quarters in a row as they always deliver quality prints in an extremely timely manner. While my wife and I will continue to use them, the folks at tech:stocker side with the many analysts and short sellers who believe the company will continue to struggle with the profitability issue until they curb their marketing spending while improving their market share.