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In order to beef up its mobile offerings which includes Shutterfly iPhone and iPad apps as well as the soon-to-be-released Treat birthday card app, Shutterfly Inc. (SFLY - Analyst Report) recently took over Penguin Digital, a mobile application developing company. The purchase consideration of the deal was not disclosed.

Penguin Digital launched an iPhone app in January, 2012 called Mobile Photo (MoPho) Factory. This app allows users to access their photos from iPhones or Facebook or Instagram accounts and create customized products and gifts while on the move. The MoPho application will be rebranded and improved over the next few months and will eventually join Shutterfly’s existing mobile offerings.

Furthermore, Penguin Digital also developed a Software Development Kit (SDK), which allows other developers to print photos as well as create photo based products through their applications.

We view the recent deal as strategically positive for both parties. Penguin Digital, which was founded in 2011, will be able to operate at a greater scale and access a larger customer base. On the other hand, Shutterfly, which offers photo-related services, will be able to enhance its mobile strategy. The latest acquisition will further affirm Shutterfly’s market leading position in the growing mobile e-commerce segment.

With customers becoming more tech-savvy, smartphones and tablets have become the order of the day. According to market research group eMarketer, more than half the mobile phone users in the U.S. are believed to be shifting to smartphones by 2013.

Shutterfly is currently focused on growing its business through strategic partnerships with retailers and acquisitions. This year, Shutterfly had already signed two acquisition agreements to get hold of Israel-based photo software company Photoccino and 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 Corp. (TGT), 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. as well as the Photoworks and Webshots brands of American Greetings Corp. . These companies offer certain services similar to those of Shutterfly and in some cases at lower price points.

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

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