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Tech stocks - Friday, December 12, 2008

A Holiday Snapshot of Shutterfly

With the Dow sliding almost 200 points today, the staff at tech:stocker spent the afternoon on the phones talking with anyone who would give us some insight on the drop. We heard two common themes: redemptions everywhere are forcing mutual funds and hedge funds to sell whenever they can and impatient investors are resorting to day trading to try to salvage a profit this year. We think both are occurring. We've spoken with several fund managers off the record who admit they are having a hard time keeping up with redemptions. They admit to having to sell perfectly solid companies in order to payoff investors who are leaving their funds. Unfortunately, they don't believe the end is around the corner.

Day trading is also coming back in fashion. This is all too obvious when you see companies with questionable fundamentals realize large gains in their share price. One of our favorite whipping boys, Salesforce.com (CRM:NASDAQ), is a perfect example having watched the stock jump almost 42% since November 21 for no apparent reason.

Even with large amounts of day trading and redemptions taking place, investors can still protect themselves by putting their money into quality companies with strong fundamentals. Ultimately, these companies will rise to the top and reward investors for their patience.

Back in July we discussed Shutterfly (SFLY:NASDAQ) and had a hard time finding any reason to invest in the stock other than we liked using them for our photos. Shortly after we submitted the post, a spouse of one of our publishers contacted us and proceeded to berate us for thrashing a company whose service she relied upon for all her photo needs. In her words, "my house would not feel like a home without the pictures I have ordered from Shutterfly." After her call, over the next few months we received several requests from our publisher to take another look at Shutterfly and see if the company has improved, and maybe even done something to deserve a few kinds words from this column. When the requests eventually turned into threats of relocating us to the Hoboken office if we didn't write something, we decided to take another run at Shutterfly.

Unfortunately, Shutterfly still doesn't look much better than it did back in July. On the positive side, the stock is down only 34.61% since our July post. Considering that Adobe (ADBE:NASDAQ), a stock we currently like is down 45.94% for the same period, this should give potential investors some confidence in the relative stability of the stock.

To Shutterfly's credit, they did have a better than expected quarter reporting a -$0.11 EPS which was 53% better than expected earnings. And they reported having $40.6 million in cash on hand which is definitely in line with their market capitalization of $189 million.

Shutterfly always hits their stride in Q4 as this is always the best quarter for the stock. While Shutterfly always returns a loss in the first three quarters of the year, the fourth quarter is when the company actually makes some money. In the short term, Shutterfly could be an interesting hedge against the retailers if you believe that people will send a mug, calendar, or something else with their family photo to relatives instead of giving them something they really want from Best Buy (BBY:NYSE).

All this being said, we still can't give this company a buy rating. Until they can manage their business so that they can make a profit in at least two quarters a year, then we will firmly believe the company needs to change their management and business philosophy (whatever it may be). We also wonder how much the company is spending on public relations. Seeing the company trying to promote summer vacation ideas in early July makes us wonder how forward thinking the company truly is. A changing of the guard in public relations might help the company's sales year round.

So if you don't hear see posts for a few days, please understand that relocating to Hoboken is not an easy process from the West coast. If only Shutterfly had done a little more to help us out.