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Why Shutterfly (SFLY) Is Tumbling on Tuesday

NEW YORK (TheStreet) -- Photo-sharing site Shutterfly (SFLY) is trading lower on Tuesday after receiving a ratings downgrade from Cowen & Co.

By midmorning, shares had taken off 5.7% to $47.58. Trading volume of 1.6 million had exceeded its three-month daily average.

Cowen downgraded the Redwood City, Calif.-based business to "underperform" from "outperform" and downwardly revised its target price to $39 from $57.

In its most recent earnings report, Shutterfly management projected a March-ending quarterly loss of between 86 cents and 92 cents a share

Management intends to invest heavily over 2014 in additional infrastructure as it seeks to expand its most profitable segment, producing physical albums and greeting cards from users' online photos. Operating expenses are set to increase on the additional investments and consolidates its four Arizona-based factories into one.

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TheStreet Ratings team rates SHUTTERFLY INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate SHUTTERFLY INC (SFLY) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • SFLY's revenue growth has slightly outpaced the industry average of 8.5%. Since the same quarter one year prior, revenues rose by 16.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The current debt-to-equity ratio, 0.32, is low and is below the industry average, implying that there has been successful management of debt levels. Along with this, the company maintains a quick ratio of 3.15, which clearly demonstrates the ability to cover short-term cash needs.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet & Catalog Retail industry. The net income has decreased by 17.7% when compared to the same quarter one year ago, dropping from $53.03 million to $43.65 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Internet & Catalog Retail industry and the overall market, SHUTTERFLY INC's return on equity significantly trails that of both the industry average and the S&P 500.

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