Lifetouch Acquisition Is A Game Changer For Shutterfly, Goldman Sachs Says In Upgrade

Shutterfly, Inc. (NASDAQ: SFLY) reported first-quarter earnings Tuesday after the close. The photo service posted a loss, but it was smaller than the Street expected. 

The Analyst

Goldman Sachs analyst Christopher Merwin upgraded Shutterfly from Sell to Neutral and increased the price target from $50 to $87.

The Thesis

The strength in Shutterfly's enterprise business helped the company report better results than the Street expected, Merwin said in a Wednesday note. (See the analyst's track record here.) 

Shutterfly reported a Q1 EPS loss of 83 cents against a consensus estimate of a 93-cent loss. 

After the results came in, Merwin said he decided to upgrade the stock and increase his 2018 EBITDA forecast by 50 percent due to the effects of Shutterfly's acquisition of Lifetouch.

Goldman's prior Sell rating was based on the thesis that slowing consumer revenue growth and lower margin enterprise revenue growth would weigh on profitability, Merwin said. It did not include potential effects of the Lifetouch acquisition. The acquisition created an opportunity for cost and revenue synergies and should smooth out seasonality, the analyst said. 

SBS continues to be a source of revenue upside, but not profit upside, as it recorded 52-percent revenue growth and a 763-basis point decline in gross margin year-over-year, according to Goldman Sachs. 

The Price Action

Shutterfly opened the session sharply higher and was up nearly 16 percent at $94.50 at the time of publication — above Goldman Sachs' target price. 

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