Shutterstock is an online platform that allows creators to exchange paid content such as images, media footage, and music. The stock has gone on an impressive run over the few months and has more than doubled since March lows.

(Shutterstock Market Chart – Seeking Alpha, 2020)

Although Shutterstock is in a favourable financial position and some key operating metrics were quite positive in the past quarter, we are pessimistic about Shutterstock’s long-term growth.

Competition doesn’t come only from Adobe

Adobe (NASDAQ:ADBE) just recently announced that they are making 70,000 different photos and videos free to license. The VP of Adobe Stock stated that “stock content has long been a powerful tool for creatives.” He also mentioned that,

“it’s essential that content creators have access to sophisticated imagery, while considerations like shrinking budgets […] have made it extremely challenging to create original work (Alexandre, 2020).”

We believe that this power move only adds to the ‘consumer ecosystem’ that Adobe is building. Adobe’s suite of software products for creators complements their photo stock business in a tremendous manner, and this is a competitive advantage that Shutterstock will never be able to replicate. This recent move also brings in new customers that would otherwise pay for Shutterstock photos, and Shutterstock won’t make the same move to ‘democratize’ art because it can’t afford to do so. We also expect Adobe to make similar moves in the near future in order to gain more market share and put pressure on the competition, while simultaneously gaining positive press for ‘supporting art’. Shutterstock also competes with the likes of Getty Images, Storyblocks, 123RF, and PixaBay.

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(Unsplash Website, 2020)

However, the notion of truly free creative content is on the rise and could be a trend in the long run. Unsplash is changing the stock image game, and the platform crossed 1 million images in May of last year. The website is filled with high-quality photos of many different subjects and backgrounds, and ultimately drives the demand for paid stock photos down because this alternative is growing in value. In theory, it makes no sense for photographers to upload on Unsplash for free when they could make money for it through Adobe Stock or Shutterstock. However, there seems to be an unwritten ‘give-and-take’ attitude in the photographer community, and uploads keep coming onto the site. Speaking of free content, we would not be surprised to see Adobe acquire Unsplash down the road, which can serve as a PR move or tactic for more market share.

Key operating metrics indicate some good, but mostly bad

The first metric that sticks out is the number of subscribers by the end of the period for this quarter compared to last year. A 39% increase in subscriber growth is very impressive, but that does not automatically lead to more revenue, as subscriber revenue for the period only jumped 11%.

The average revenue per customer remains basically unchanged, and this is definitely an area for concern moving forward, given that Shutterstock only offers a few types of products to consumers, whereas Adobe has that ‘ecosystem’ of products and can raise revenue per customer through personalized marketing tactics.

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Although the number of images increased by 18% in this quarter compared to last year, paid downloads actually went down for the quarter, signifying that adding onto the already-massive collection of photos does not automatically lead to growth. Revenue per photo in 3Q/2020 was $0.19, compared to $0.20 in 3Q/2019.

Shutterstock states that subscribers are defined as those “who purchase one or more of our monthly recurring products for a continuous period of at least three months (Shutterstock 10-Q, 2020).” They also mention that “an increase in our number of subscribers is an indicator of […] potential for future growth (Shutterstock 10-Q, 2020).” However, this would only be true Shutterstock had a unique competitive advantage in the industry. There is no real incentive for customers to stay on the platform, especially if competitors release timely incentives such as the 70,000 free photo program to lure consumers. An increase in Shutterstock subscribers, if anything, only promotes more competition within the industry.

Revenue has been stagnant for a few years

(Koyfin Financial Analysis, 2020)

Compared to 4Q/2018, revenue has only grown 2%. The increase in gross margin can be attributed to partly reducing expenses in reaction to COVID-19, and we do not expect to see gross margin figures to be hovering around mid-60% for the foreseeable future.

(Shutterstock 10-Q, 2020)

Enterprise revenue continues to struggle as revenues for both the three months ended and nine months ended periods fell in comparison to last year. This is alarming, considering that Shutterstock should be able to leverage its brand to curate unique content for big companies, but they are consistently failing to grow in this category partly because of increasing competition. Marketing and content agencies are popping up everywhere, and Shutterstock faces plenty of indirect competition.

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Shutterstock is still a prominent leader in the content space

Despite all the aforementioned concerns, Shutterstock is arguably the best company for content and benefits significantly from network extrapolation effects as consumers have so much variety to choose from. Shutterstock has performed well in an industry that has grown during the pandemic and may continue to see benefits as a market leader if the creator industry continues to grow at a fast pace.

In summation, we are a bit worried about the long-term incentives for consumers to continue to use the platform, and competition is growing at a rapid pace due to increased technology transparency and low barriers to entry. Shutterstock’s P/E ratio is also quite high at 48.04. Therefore, we are staying away from the stock and will re-consider evaluating the company once again if ratios reach reasonable levels.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.