Shutterfly Adds Photo Software Firm

Shutterfly Inc. (SFLY - Analyst Report) recently took over an Israel-based photo software company Photoccino which develops technologies for photo ranking and analysis. The purchase consideration of the deal includes less than $5 million in cash. However, all Photoccino employees will continue to serve the new boss from their old workstation in Haifa, Israel.

We view the recent deal as strategically positive for both parties. Photoccino, which was founded in 2011, will be able to go global and operate at a greater scale. On the contrary, Shutterfly, which offers photo-related services, will be able to enhance its online photo sharing as well as photo book business through this acquisition.

Shutterfly will deploy Photoccino’s advanced image-analysis to all its brands the Shutterfly, Tiny Prints, Wedding Paper Divas and Treat brands. Users will be allowed to organize their photos quickly from their large archives and create printed photo books, cards and albums.

Shutterfly is focused on growing its business through strategic partnerships with retailers and acquisitions. In March this year, Shutterfly signed an agreement to get hold of the Kodak Gallery. A year ago, this leading Internet-based social expression and personal publishing services company took over a privately held card design company Tiny Prints.

In the second quarter of 2010, the company entered into an agreement with Sony to give customers instant access to Shutterfly's Simple Path Photo Books on new Sony Vaio computers. The company is also in a tie-up with Target Corporation, a leading discount retailer in the United States. Additionally, the company acquired Nexo in 2008 and TinyPictures in September 2009.

We believe such strategic acquisitions augur well for Shutterfly. The company’s competitors include LookSmart Ltd. (LOOK) as well as the Photoworks and Webshots brands of American Greetings Corp. (AM). These companies offer certain services similar to those of Shutterfly and in some cases at lower price points.

Shutterfly currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.